tag:blogger.com,1999:blog-17857995042496112302024-03-13T19:34:24.015+00:00Crescendo Advisors - enterprise risk management, financial regulation, governanceCrescendo Advisors is a boutique risk management consultancy. There is a lot happening at the crossroads between enterprise risk management, financial regulation and governance.Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.comBlogger88125tag:blogger.com,1999:blog-1785799504249611230.post-69095938840382280082021-07-21T11:35:00.001+01:002021-07-21T11:35:30.754+01:00What difference does regulation make to ESG? <p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;">The short answer is $2trillion ...</p><p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;"><br /></p><p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;">You hear a lot about the impacts of regulation but this one should probably be at the top of anyone's list. </p><p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;"><br /></p><p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;">According to a recent report from Global Sustainable Investment Alliance, sustainable investment assets fell by 15% between 2018 and 2020 (from $14 trillion to $12trillion) as a result of the introduction of rules about funds greenwashing. The Sustainable Finance Disclosure Regulation (or SFDR) requires funds managers to consider and disclose the ESG credentials of their funds. </p><p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;"><br /></p><p style="background-color: white; font-family: Calibri, Helvetica, sans-serif, EmojiFont, "Apple Color Emoji", "Segoe UI Emoji", NotoColorEmoji, "Segoe UI Symbol", "Android Emoji", EmojiSymbols; font-size: 16px; margin-bottom: 0px; margin-top: 0px;"><a class="OWAAutoLink" href="https://www.bloomberg.com/news/articles/2021-07-18/european-esg-assets-shrank-by-2-trillion-after-greenwash-rules?cmpid=BBD071921_GREENDAILY&utm_medium=email&utm_source=newsletter&utm_term=210719&utm_campaign=greendaily" id="LPlnk698980" previewremoved="true">https://www.bloomberg.com/news/articles/2021-07-18/european-esg-assets-shrank-by-2-trillion-after-greenwash-rules?cmpid=BBD071921_GREENDAILY&utm_medium=email&utm_source=newsletter&utm_term=210719&utm_campaign=greendaily</a></p>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-28696892352650813052021-06-29T10:31:00.004+01:002021-08-13T14:23:14.854+01:00Operational resilience: how much to learn from Covid-19?<p>One of the questions in the mind of many CROs, COOs and NEDs
is how much the industry has learnt from the response to Covid-19. Crescendo Advisors survey of insurers’ lessons
learnt highlighted that the industry has learnt a fair amount. We have written a separate article about five
practical lessons for the implementation of operation resilience for financial
services (https://www.crescendo-erm.com/operational-resilience). </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">But is there more to learn? To what extent can the industry claim
‘mission accomplished’ because continuity of service has been maintained during
Covid-19? These are important questions, and the answer will shape the
resources available to implement operational resilience.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">To consider these questions, think about the two main
features of the challenge that Covid-19 represents for financial services: </p><p class="MsoNormal"><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span style="text-indent: -18pt;">it was not characterised by
a failure of IT system(s) but by a challenge of access to offices; and </span></p><p class="MsoNormal"><span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span style="text-indent: -18pt;">it was a generalised issue.</span></p><p class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-indent: -18pt;"><o:p></o:p></p>
<p class="MsoNormal">If you think of these two features, you can easily develop a
grid of operational resilience threats – see below with some examples:<o:p></o:p></p>
<table align="left" border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin-left: 6.75pt; margin-right: 6.75pt; mso-padding-alt: 0cm 0cm 0cm 0cm; mso-table-anchor-horizontal: margin; mso-table-anchor-vertical: paragraph; mso-table-left: center; mso-table-lspace: 9.0pt; mso-table-rspace: 9.0pt; mso-table-top: 4.1pt; mso-yfti-tbllook: 1056; width: 446px;">
<tbody><tr style="height: 30.85pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td style="background: rgb(234, 140, 140); border-bottom: solid white 3.0pt; border: 1pt solid white; height: 30.85pt; padding: 3.6pt 7.2pt; width: 102.05pt;" width="136">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><b>Type
of failure vs. scope of failure</b><o:p></o:p></p>
</td>
<td style="background: rgb(234, 140, 140); border-bottom: 3pt solid white; border-left: none; border-right: 1pt solid white; border-top: 1pt solid white; height: 30.85pt; mso-border-left-alt: solid white 1.0pt; padding: 3.6pt 7.2pt; width: 116.2pt;" width="155">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><b><span style="color: black; mso-color-alt: windowtext;">IT systems failure</span></b><o:p></o:p></p>
</td>
<td style="background: rgb(234, 140, 140); border-bottom: 3pt solid white; border-left: none; border-right: 1pt solid white; border-top: 1pt solid white; height: 30.85pt; mso-border-left-alt: solid white 1.0pt; padding: 3.6pt 7.2pt; width: 116.2pt;" width="155">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><b><span style="color: black; mso-color-alt: windowtext;">Other business failure</span></b><o:p></o:p></p>
</td>
</tr>
<tr style="height: 47.1pt; mso-yfti-irow: 1;">
<td style="background: rgb(248, 215, 205); border-top: none; border: 1pt solid white; height: 47.1pt; mso-border-top-alt: solid white 3.0pt; padding: 3.6pt 7.2pt; width: 102.05pt;" width="136">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><b><span style="color: black; mso-color-alt: windowtext;">Idiosyncratic</span></b><o:p></o:p></p>
</td>
<td style="background: rgb(248, 215, 205); border-bottom: 1pt solid white; border-left: none; border-right: 1pt solid white; border-top: none; height: 47.1pt; mso-border-left-alt: solid white 1.0pt; mso-border-top-alt: solid white 3.0pt; padding: 3.6pt 7.2pt; width: 116.2pt;" width="155">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><span style="color: black; mso-color-alt: windowtext;">Customer applications unavailable</span><o:p></o:p></p>
</td>
<td style="background: rgb(248, 215, 205); border-bottom: 1pt solid white; border-left: none; border-right: 1pt solid white; border-top: none; height: 47.1pt; mso-border-left-alt: solid white 1.0pt; mso-border-top-alt: solid white 3.0pt; padding: 3.6pt 7.2pt; width: 116.2pt;" width="155">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><span style="color: black; mso-color-alt: windowtext;">Transformation project fails </span><o:p></o:p></p>
</td>
</tr>
<tr style="height: 30.3pt; mso-yfti-irow: 2; mso-yfti-lastrow: yes;">
<td style="background: rgb(252, 236, 232); border-top: none; border: 1pt solid white; height: 30.3pt; mso-border-top-alt: solid white 1.0pt; padding: 3.6pt 7.2pt; width: 102.05pt;" width="136">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><b><span style="color: black; mso-color-alt: windowtext;">Generalised</span></b><o:p></o:p></p>
</td>
<td style="background: rgb(252, 236, 232); border-bottom: 1pt solid white; border-left: none; border-right: 1pt solid white; border-top: none; height: 30.3pt; mso-border-left-alt: solid white 1.0pt; mso-border-top-alt: solid white 1.0pt; padding: 3.6pt 7.2pt; width: 116.2pt;" width="155">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><span style="color: black; mso-color-alt: windowtext;">Cloud operators fail</span><o:p></o:p></p>
</td>
<td style="background: rgb(252, 236, 232); border-bottom: 1pt solid white; border-left: none; border-right: 1pt solid white; border-top: none; height: 30.3pt; mso-border-left-alt: solid white 1.0pt; mso-border-top-alt: solid white 1.0pt; padding: 3.6pt 7.2pt; width: 116.2pt;" width="155">
<p align="center" class="MsoNormal" style="margin-bottom: 0cm; mso-element-anchor-horizontal: margin; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-left: center; mso-element-top: 4.1pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly; text-align: center;"><span style="color: black; mso-color-alt: windowtext;">Covid-19</span><o:p></o:p></p>
</td>
</tr>
</tbody></table>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><o:p><br /></o:p></p><p class="MsoNormal"><o:p>C</o:p>ovid-19 represents only one of various types of operational
resilience threat for financial services.
It also hints that a different response might be needed to mitigate customer
detriment such as remote access to IT systems in the case of Covid-19 and
quickly restoring IT systems that have failed. </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">So Covid-19 has allowed a good amount of testing of
vulnerabilities.<span style="mso-spacerun: yes;"> </span>Some of the lessons learnt,
e.g. investing in crisis management, are likely to be transferable across the categories
in the table.<span style="mso-spacerun: yes;"> </span>However, maintaining an
appropriate degree of resilience will require a wider consideration of the
potential threats and responses. <o:p></o:p></p><p class="MsoNormal"><b><i>Crescendo Advisors (</i></b><a href="https://www.blogger.com/blog/post/edit/1785799504249611230/9052296089827473340"><b><i>www.crescendo-erm.com</i></b></a><b><i>) is a boutique risk management consultancy. We would be happy to discuss our findings from the Covid-19 lessons survey. We can also support your efforts to both learn lessons from Covid-19 using the tools we developed and implement the regulatory requirements for operational resilience.</i></b></p>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-83640880500895926512020-11-11T10:28:00.003+00:002020-11-11T10:28:47.592+00:00Climate Change Financial Risk in Bite Sizes 2: The role of ORSA / ICAAP<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-eCCPI6lpnKY/X6u8AhVmviI/AAAAAAAAGYk/6WZdk0nRbtQI0_3XZB_ECcjCNJpJvfFdACNcBGAsYHQ/s1280/Climate%2BChange%2Bin%2BBite%2Bsize%2B02.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="720" data-original-width="1280" height="339" src="https://1.bp.blogspot.com/-eCCPI6lpnKY/X6u8AhVmviI/AAAAAAAAGYk/6WZdk0nRbtQI0_3XZB_ECcjCNJpJvfFdACNcBGAsYHQ/w574-h339/Climate%2BChange%2Bin%2BBite%2Bsize%2B02.jpg" width="574" /></a></div><br /> <p></p>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-59967112685327516332020-11-06T12:47:00.005+00:002020-11-11T10:26:15.538+00:00Climate Change Financial Risk in Bite Sizes 1: The role of the CRO<p><span style="font-family: helvetica;"></span></p><div class="separator" style="clear: both; text-align: center;"><br /></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><span style="font-family: helvetica;"><div class="separator" style="clear: both; text-align: center;"><a href="https://lh3.googleusercontent.com/-8lK9d4nuZvU/X6VjhLkSm3I/AAAAAAAAGYM/bSku9bHQoFUfLWI9VFegUwTD7OMi7JcGQCNcBGAsYHQ/image.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="720" data-original-width="1280" height="300" src="https://lh3.googleusercontent.com/-8lK9d4nuZvU/X6VjhLkSm3I/AAAAAAAAGYM/bSku9bHQoFUfLWI9VFegUwTD7OMi7JcGQCNcBGAsYHQ/w554-h300/image.png" width="554" /></a></div></span></blockquote><span style="font-family: helvetica;"><br /><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><span style="font-family: helvetica;"><br /></span></blockquote><div class="separator" style="clear: both; text-align: center;"><br /></div></span><p><br /></p>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0London, UK51.5073509 -0.127758323.197117063821153 -35.284008299999996 79.817584736178844 35.028491700000004tag:blogger.com,1999:blog-1785799504249611230.post-41261947763375509732020-10-06T23:31:00.001+01:002020-10-06T23:41:10.576+01:00Five Lessons for Operational Resilience from Covid-19: The Goldilocks Approach<p class="MsoNormal">Earlier this year, Crescendo Advisors undertook a survey of
the insurers’ lessons learnt from managing Covid-19 disruption. This was based on in-depth discussion with 24
senior stakeholders with a turnover of about £120bn. We covered readiness before Covid-19, how the
crisis was managed and lessons for the future.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">In parallel, regulators were consulting on requirements for operational
resilience. They do not plan to require
firms to meet them before the end of 2021.
This is then the time to think in earnest about implementation. One aspect of the requirements is learning
from events like Covid-19. We thought
that we would review our findings and identify what we can learn for the
implementation of operational resilience.
<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-ofvoxqAbaCo/X3zvizwH3KI/AAAAAAAAGWE/rPmoctMV70kYMv5GWEyVUO0rKpi4vvnlwCNcBGAsYHQ/s2048/pexels-jo%25C3%25A3o-cabral-4972653.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="2048" data-original-width="1365" height="320" src="https://1.bp.blogspot.com/-ofvoxqAbaCo/X3zvizwH3KI/AAAAAAAAGWE/rPmoctMV70kYMv5GWEyVUO0rKpi4vvnlwCNcBGAsYHQ/s320/pexels-jo%25C3%25A3o-cabral-4972653.jpg" /></a></div><p class="MsoNormal">Broadly speaking we identified two contrasting views. Some saw Covid-19 as an unprecedented event
and thought that there was little that could be learnt for the implementation
of operational resilience. Others were
concerned that the industry’s success at keeping the show on the road could give
an impression that operational resilience is not an issue. We do not subscribe to these views and identified
five practical lessons, which is more consistent with the Goldilocks approach –
not too little, not too much.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b><i>Lesson 1: Do
not assume that you will get the same advance warning for the next operational
resilience event <o:p></o:p></i></b></p>
<p class="MsoNormal">While few firms anticipated a pandemic of the scale of
Covid-19, firms had a 6 to 8 weeks before lockdown to prepare, which many used
very well to prepare for the inevitable lockdown and social mobility
restrictions that were anticipated. Our
survey suggested that industry readiness would have been very poor absent these
preparations. <o:p></o:p></p>
<p class="MsoNormal">Looking ahead, it is unlikely that in the type of
operational resilience scenarios that are more likely in the future, e.g.
system failures, firms will have such a luxurious amount of time in which to
enhance your resilience. <o:p></o:p></p>
<p class="MsoListParagraph" style="margin-left: 0cm; mso-add-space: auto;"><b><i>Lesson
2: Invest in crisis management as part of operational resilience preparations<o:p></o:p></i></b></p>
<p class="MsoNormal">Operational resilience requirements rightly focus on
governance, planning (identification of key business services, setting
tolerance and analysis of resilience in severe but plausible scenarios), and
enhancing resilience where it falls below the agreed tolerance. <o:p></o:p></p>
<p class="MsoNormal">However, when an operational resilience event takes place
you will also need a well-oiled crisis management capability. Participants who chanced to have tested crisis
management capabilities before Covid-19 noted the benefits from that. It is important to review and test your crisis
management capabilities (e.g. war games) as part of the implementation of operational
resilience. <o:p></o:p></p>
<p class="MsoNormal"><b><i>Lesson 3: Working
from home (WFH) is useful but challenges your potential back-up<o:p></o:p></i></b></p>
<p class="MsoNormal">The ability to work from home was a key aspect of the
response to Covid-19; at the same time recovery sites proved to be not very
useful in this scenario. This has also
led to a wider discussion about the role of the office and the possibility of
home being the new BAU. But if WFH is the new BAU, what is the back-up for the
next operational resilience event? <o:p></o:p></p>
<p class="MsoNormal"><b><i>Lesson 4: Think about scenarios and stress testing in
an integrated manner<o:p></o:p></i></b></p>
<p class="MsoNormal">While insurers considered scenarios before Covid-19, few anticipated
a pandemic of this scale with all of its financial and economic implications. Looking ahead at the development of scenarios
for operational resilience, this raises a challenge about the importance of consistently
considering the financial and operational implications of scenarios in ORSA and
operational resilience. <o:p></o:p></p>
<p class="MsoNormal"><b><i>Lesson 5: Outsourcing of key activities is likely to
be a challenge for operational resilience<o:p></o:p></i></b></p>
<p class="MsoNormal">Participants identified outsourcing as an area where they
would like to spend more time monitoring performance. Where outsourcing was material, the
experience of Covid-19 was mixed. Interestingly, good performance during Covid-19
in outsourcing was associated with a business rationale going beyond cost
savings or managed as an integral part of the business. <o:p></o:p></p>
<p class="MsoNormal">These are industry lessons.
But what lessons can you extract from your own business experience of
managing Covid-19? We encourage you to
formalise the lessons learnt exercise.
You may learn something new or unexpected about your business. But more
generally the exercise can inform wider decision making; one insurer had a
clear vision that their Covid-19 lessons learnt should feed into a strategic
review. At the very least it will support your operational resilience planning
and delivery.<o:p></o:p></p>
<p class="MsoNormal" style="line-height: 12.85pt;"><b><i>This post has been written
by Isaac Alfon (Managing Director) and Shirley Beglinger (Advisory Board
Member) from Crescendo Advisors. It is based on a presentation to
ORIC’s Covid-19 Industry Group.<o:p></o:p></i></b></p><p class="MsoNormal" style="line-height: 12.85pt;"><b><i>Crescendo Advisors (</i></b><a href="https://www.blogger.com/blog/post/edit/1785799504249611230/9052296089827473340"><b><i><span color="windowtext" style="text-decoration-line: none;">www.crescendo-erm.com</span></i></b></a><b><i>)
is a boutique risk management consultancy. We would be happy to share an
overview of the findings from the Covid-19 lessons survey. We can also support your efforts
to both learn lessons from Covid-19 using the tools we developed for this
survey and implement the regulatory requirements for operational resilience.</i></b></p>
<p class="MsoNormal"><span style="font-family: times; font-size: x-small;">P<span style="color: #1a1a1a;">hoto by</span><span style="color: #1a1a1a;"> </span><span style="box-sizing: border-box; color: #1a1a1a; font-weight: 600; margin-bottom: 0px; margin-top: 0px;"><a href="https://www.pexels.com/@joao-cabral-1723948?utm_content=attributionCopyText&utm_medium=referral&utm_source=pexels" style="box-sizing: border-box; margin-bottom: 0px; margin-top: 0px; text-decoration-line: none;">João Cabral</a></span><span style="color: #1a1a1a;"> </span><span style="color: #1a1a1a;">from</span><span style="color: #1a1a1a;"> </span><span style="box-sizing: border-box; color: #1a1a1a; font-weight: 600; margin-bottom: 0px; margin-top: 0px;"><a href="https://www.pexels.com/photo/grayscale-photo-of-lighthouse-on-hill-4972653/?utm_content=attributionCopyText&utm_medium=referral&utm_source=pexels" style="box-sizing: border-box; margin-bottom: 0px; margin-top: 0px; text-decoration-line: none;">Pexel</a></span></span></p><div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><br /></div><div class="level__right" style="-webkit-box-align: center; -webkit-box-flex: 0; -webkit-box-pack: end; align-items: center; background-color: #e8e8e8; box-sizing: border-box; color: #1a1a1a; flex: 0 0 auto; font-family: -apple-system, BlinkMacSystemFont, "segoe ui", roboto, oxygen, cantarell, "helvetica neue", ubuntu, sans-serif; font-size: 14px; justify-content: flex-end; max-width: 100%;"><div class="level__item" style="-webkit-box-align: center; -webkit-box-flex: 0; -webkit-box-pack: center; align-items: center; box-sizing: border-box; display: flex; flex: 0 0 auto; justify-content: center;"></div></div>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-20548542008088059602020-09-22T18:27:00.001+01:002020-09-22T18:27:08.884+01:00The FCA business interruption Test Case – Closure, or grinding onward?<p><span style="font-family: arial;">The UK High Court handed down its verdict on the Financial
Conduct Authority’s test case on Business Interruption on September 15. Some of
the 370,000 policyholders affected will now be hoping to receive insurance
payouts in time to stave off bankruptcy. Others will now be considering whether
they have viable grounds for appeal.</span></p><p></p><div class="separator" style="clear: both; text-align: center;"><span style="clear: right; float: right; font-family: arial; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1132" data-original-width="2048" src="https://1.bp.blogspot.com/-dEF7Nk1GopQ/X2oyLqPbDwI/AAAAAAAAGVU/QG_D26U0MmQitwPAvcxmRRqDyZRMJGq5wCNcBGAsYHQ/s320/bill-oxford-OXGhu60NwxU-unsplash.jpg" width="320" /></span></div><p></p><p class="MsoNormal"><span style="font-family: arial;">There were a number of battlegrounds in the case. BILA
(British Insurance Law Association) will be holding a webinar on September 28,
but in the meantime some of the interesting points were:</span></p><p class="MsoNormal"></p><ul style="text-align: left;"><li><b style="font-family: arial; text-indent: -18pt;">Causation:</b><span style="font-family: arial; text-indent: -18pt;"> The Court
held that the proximate cause of the business interruption was the composite
peril of the business interruption following the occurrence of the notifiable
disease. Individual outbreaks were deemed to be part of a national whole.</span></li></ul><ul style="text-align: left;"><li><b style="font-family: arial; text-indent: -18pt;">Public authority and
prevention of access</b><span style="font-family: arial; text-indent: -18pt;"> clauses differed between the policy wordings under
consideration, with some being deemed to provide narrow, localised cover while
others were deemed to respond to government regulation when it was issued on
March 26.</span></li></ul><ul style="text-align: left;"><li><b style="font-family: arial; text-indent: -18pt;">Trends</b><span style="font-family: arial; text-indent: -18pt;"> clauses are
relevant to the calculation of the insured loss because they take account of
the circumstances/trends of the insured business. Insurers relied on the
decision in Orient Express Hotels v Assicurazioni Generali Spa (UK)* to argue that the insured could
not show that the business loss would not have been suffered ‘but for’ the
insured peril because many businesses would have suffered loss in any event due
to the Covid-19 epidemic. The court felt that Orient Express had been
incorrectly decided and therefore did not follow the precedent.</span></li></ul><p></p>
<p class="MsoNormal"><span style="font-family: arial;">Appeals from both sides are likely, and then a key question
will be whether the Court of Appeal chooses to hear the case or leapfrog it
straight to the Supreme Court. An expedited appeal might be heard in late 2020
/ early 2021, but not even that will really bring closure. Major UK insurers who
are not currently part of the FCA test case will likely find that policyholders
seek to read judgments across to their coverage, and thus find themselves
embroiled in coverage disputes. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;">Meanwhile in the background and on the sidelines, the
skirmishing will continue. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;">The FCA has published a <a href="https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-business-interruption-insurance.pdf">Dear
CEO letter</a> suggesting quite strongly that insurers should not seek to
deduct furlough and similar government payments from any claim settlement, but
they have not provided any guidance on how else such payments might be fairly
treated.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;">Reinsurers have already given strong indications of their
intention to scrutinise any payments which insurers may make and for which they
may seek to recover under their reinsurance arrangements. Certainly catastrophe
reinsurers will be considering:</span></p><p class="MsoNormal"></p><ul style="text-align: left;"><li><span style="font-family: arial; text-indent: -18pt;">The operation of hours
clauses: the treaties are designed to respond for specific identifiable events
such as earthquakes and windstorms. In the case of a disease outbreak, is it a
natural catastrophe? When does the event begin and end? Is it one event, or
several?</span></li></ul><ul style="text-align: left;"><li><span style="font-family: arial; text-indent: -18pt;">Loss quantification: if an
insurer has been using poorly drafted policy wordings which resulted in
coverage being awarded where none was intended, can the reinsurer argue that
this qualifies as some sort of ex gratia payment and is hence not recoverable?</span></li></ul><ul style="text-align: left;"><li><span style="font-family: arial; text-indent: -18pt;">Loss aggregation: a large
composite insurer may have multiple portfolios of risk – say SME property/BI, marine
and event cancellation (to name just a few). If treaties are written on
different bases (eg occurrence vs risks attaching) how will insurers aggregate
their losses? </span></li></ul><p></p>
<p class="MsoNormal"><span style="font-family: arial;">And so the Business Interruption battle will grind onward –
in adjudication as well as in arbitration. Certainly many new precedents will
be set. It’s an interesting time to be considering insurance and reinsurance
disputes.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: arial; text-indent: -24px;">* Trading as Generali Global Risk, [2010] EWHC 1186 (Comm).</span></p>
<p class="MsoNormal" style="line-height: 12.85pt;"><b><span style="font-family: arial;"><i><span style="color: black;">This
post has been written Shirley Beglinger (Advisory Board Member) at Crescendo
Advisors. </span></i></span></b></p><p class="MsoNormal" style="line-height: 12.85pt;"><b><span style="font-family: arial;"><i><span style="color: black;">Crescendo Advisors (</span></i><a href="https://www.blogger.com/blog/post/edit/1785799504249611230/9052296089827473340"><i>www.crescendo-erm.com</i></a><i><span style="color: black;">) is a boutique risk management consultancy. </span>Crescendo
Advisors has a solid track record of successful engagements in both
adjudication and arbitration.<span style="color: black;"> </span></i></span></b></p>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-90522960898274733402020-09-09T22:45:00.001+01:002020-09-09T22:45:47.536+01:00Lessons Learnt from Covid-19 ... or Not?<p><span style="color: windowtext; text-align: justify; text-indent: 0cm;">Covid-19
is a health crisis, a business crisis and an economic crisis which has struck
the insurance industry hard.</span></p>
<p class="MsoListBullet" style="margin-left: 0cm; mso-list: none; text-align: justify; text-indent: 0cm;"><span style="color: windowtext; mso-ansi-language: EN-GB;">Claims
spiked in some areas while volatile financial markets made it almost impossible
to steer the investment portfolio, and lockdown measures kept staff at home
while struggling to cope with surging call and claim volumes. Meanwhile, there
is vocal pressure from some quarters for a “flexible” approach to claims, where
“flexible” is shorthand for dishing out large amounts of money for claims which
may or may not be covered. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<p class="MsoListBullet" style="margin-left: 0cm; mso-list: none; text-align: justify; text-indent: 0cm;"><span style="color: windowtext; mso-ansi-language: EN-GB;">How
has the industry coped, and what lessons has it learned? <o:p></o:p></span></p>
<p class="MsoListBullet" style="margin-left: 0cm; mso-list: none; text-indent: 0cm;"><span style="color: windowtext; mso-ansi-language: EN-GB;">To answer that question,
Crescendo Advisors carried out a series of structured interviews with a
selection of risk and finance professionals from insurance firms. Most of the
firms were UK based, with an aggregate turnover of £120 billion in 2019. <o:p></o:p></span></p>
<p class="MsoListBullet" style="margin-left: 0cm; mso-list: none; text-indent: 0cm;"><span style="color: windowtext; mso-ansi-language: EN-GB;">Although the firms varied in
size and portfolio mix, there was a high degree of consensus in their opinions.
Here are Crescendo’s top five findings and conclusions:</span></p><p class="MsoListBullet" style="margin-left: 0cm; text-align: left; text-indent: 0cm;"></p><ul style="text-align: left;"><li><span style="color: windowtext; text-indent: 0cm;">While
most UK firms have weathered the crisis to date, it appears that few did so as
laid out in their pre-Covid-19 business continuity planning.</span><span style="color: windowtext; text-indent: 0cm;"> </span><span style="color: windowtext; text-indent: 0cm;">Business continuity plans usually assumed local
outbreaks and had to be re-created in the face of a total and global shutdown.</span></li></ul><ul style="text-align: left;"><li><span style="color: windowtext;">All firms
who viewed their lockdown experience as ‘successful’ attributed that to
excellent, ongoing communication from senior management to all stakeholders;</span></li></ul><ul style="text-align: left;"><li><span style="color: windowtext;">The
traditional hostility to staff working from home has changed from “not
possible” to “why not?”. Going forward firms expect staff to continue working
at least part-time from home, and hence plan on reductions in their office
footprint;</span></li></ul><ul style="text-align: left;"><li><span style="color: windowtext; text-indent: -18pt;">As remote working and virtual teams have become the
post-Covid vogue, the purpose and value of The Office is being critically
re-evaluated. It may still be the best place for meetings and staff onboarding,
but do we really need all those desks crowded together?</span></li></ul><ul style="text-align: left;"><li><span style="color: windowtext; text-indent: -18pt;">With staff working remotely, the cost-benefit dynamic
of outsourcing could be changed so that firms will find it beneficial and
desirable to bring activities back in-house.</span></li></ul><p></p>
<p class="MsoListBullet" style="line-height: 107%; margin-bottom: 8.0pt; mso-list: none; text-indent: 0cm;"><span style="color: windowtext;">Interestingly,
while most participants anticipated the need for a lessons learnt exercise,
only one of them acknowledged at the time that his firm was already kicking off
such an exercise.</span></p>
<p class="MsoNormal" style="line-height: 107%; margin-bottom: 8.0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="color: windowtext;">Are insurers
perhaps being complacent? They had six weeks to prepare for lockdown and they
put the time to good use. By the time staff were required to stay home, many did
so with newly acquired laptops and secure connections. The main limitations on
productivity came from the lack of suitable home office facilities or from
inadequate broadband speeds. The show stayed on the road with remarkably few
wobbles. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 107%; margin-bottom: 8.0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="color: windowtext;">Next year UK
insurers are likely to work in the implementation of operational resilience
requirements.<span style="mso-spacerun: yes;"> </span>There are lessons to be
learnt from Covid-19.<span style="mso-spacerun: yes;"> </span>But here’s a
thought, if working from home is no longer the backup disaster recovery plan –
it is the new normal – what is the new disaster recovery plan? <o:p></o:p></span></p><p class="MsoNormal" style="line-height: 107%; margin-bottom: 8.0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="color: windowtext;"><i>This post has been written by Isaac Alfon (Managing Director) and Shirley Beglinger (Advisory Board Member) at Crescendo Advisors. </i></span></p><p class="MsoNormal" style="line-height: 107%; margin-bottom: 8.0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><i style="text-align: justify;"><span style="color: windowtext;">Crescendo
Advisors (</span></i><a href="http://www.crescendo-erm.com/" style="text-align: justify;"><i>www.crescendo-erm.com</i></a><i style="text-align: justify;"><span style="color: windowtext;">) is a boutique risk management consultancy. We would be happy to share an overview of the
findings of this survey. We can also support
your efforts to both learn lessons from Covid-19 using the tools we developed
for this survey and consider the implications of working from home arrangements
for the risk and control environment.</span></i></p>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-82299264110675279252020-06-14T14:01:00.004+01:002020-09-03T10:00:27.698+01:00Delegating Decision Making to AI Tools – Choices and Consequences*<div><font face="arial" size="2"><br /></font></div><div><font face="arial" size="2">Sometimes when I hear about Artificial Intelligence (AI) tools
it seems like it is all about the technical details of the model and the data,
which is certainly very important. This post is about another important aspect:
the operating model in which the AI tool will operate.</font></div><div><p class="MsoNormal"><font face="arial" size="2"><o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">There are many
aspects of such an operating model. Some
are practical, such as ensuring that the tools integrate with other parts of
the business. In this post, I am
focusing on the delegation of decision making to the AI tool – the choices that
exist in most cases and the implications for the control environment. These are summarised in the figure below.</font></p><div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-iXgp22ztlnA/XuYeFVhhYFI/AAAAAAAAF14/x-4d9GBdyowOANcWqG5FiYvGya6ZGM-wQCK4BGAsYHg/s5339/Graph%2Bfor%2Bblog.png" style="margin-left: 1em; margin-right: 1em;"><font face="arial" size="2"><img border="0" data-original-height="3334" data-original-width="5339" height="250" src="https://1.bp.blogspot.com/-iXgp22ztlnA/XuYeFVhhYFI/AAAAAAAAF14/x-4d9GBdyowOANcWqG5FiYvGya6ZGM-wQCK4BGAsYHg/w400-h250/Graph%2Bfor%2Bblog.png" width="400" /></font></a></div><p class="MsoNormal"><font face="arial" size="2">At one extreme of the delegation of decision making, you
have AI tools that operate independently of human intervention. An example is algorithmic trading or an <span color="" style="text-decoration-line: none;">automated trading system</span> which trade
without any human intervention to use the speed and data processing advantages
that computers have over a human trader. Interestingly, this also represents one of the
few prescriptive examples of PRA intervention where it requires that a human
has the possibility of stopping the trading system.<a href="file:///C:/Users/isaac/Google%20Drive/Cloud/Crescendo%20Advisors/Development/Topics/AI/Blog/Business%20choices%20and%20AI%20v01.docx#_ftn1" name="_ftnref1" title=""><sup><sup><span face="" style="font-size: 11pt; line-height: 107%;">[1]</span></sup></sup></a></font></p><p class="MsoNormal"><font face="arial" size="2"><o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">At the other end of
the spectrum, there are AI tools used by experts in a professional
environment. For example, actuaries
might use machine learning techniques to undertake experience analysis and
support reserving work. <o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">Between these two
examples, you have AI tools that provide a forecast or recommendation for consideration
by an analyst. For example, the AI tool
could provide a credit rating that validates a rating derived using more
traditional methods.<o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">Another middle of
the road alternative is ‘management by exception’. This means that the AI tools have a degree of
autonomy to operate within a ‘norm’, which is inferred from historical
data. Cases that are outside the norm
are then referred to an analyst for consideration to improve and verify the
predictions. <o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">These are business choices
and in turn have implications for the development process of AI tools. You would expect controls around data and
model documentation in all cases. But broadly
speaking you would also expect a tighter control and a more intense validation
for AI tools that operate more independently of human intervention. This includes the depth of model’s
understanding, including: <o:p></o:p></font></p>
<p class="MsoListParagraphCxSpFirst" style="text-indent: -18pt;"></p><ul style="text-align: left;"><li><font face="arial" size="2">explainability – why did the
model do that; </font></li><li><font face="arial" size="2">transparency – how does the
model work;</font></li><li><font face="arial" size="2">the impact on customers – e.g.,
the difference between Netflix recommendations and credit card underwriting. </font></li></ul><font face="arial" size="2"><!--[if !supportLists]--><o:p></o:p></font><p></p>
<p class="MsoListParagraphCxSpMiddle" style="text-indent: -18pt;"><font face="arial" size="2"><o:p></o:p></font></p>
<p class="MsoListParagraphCxSpLast" style="text-indent: -18pt;"><font face="arial" size="2"><o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">The choices of operating model also have important
implications for staff training. AI tools operated by staff that have not been
involved in its development must be trained to the appropriate level to ensure
that the AI tool operates effectively.
For example, where ‘management by exception’ is adopted, staff would
need the appropriate knowledge and skills to deal with the exceptions.<o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">There are important choices for the operating model into
which AI tools are deployed. These
choices have risk management and control implications and these choices may
change over time. An AI tool might start
operating in an advisory capacity. As
trust in the AI tool increases then the delegated decision making can be
increased. <o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2">These implications and choices should be considered as part
of the model design.<o:p></o:p></font></p>
<p class="MsoNormal"><font face="arial" size="2"><b><i><span style="color: #333333;"><span style="background: white; color: black;">We hope you found this post of interest. You can subscribe and receive further posts by email. See the box on the right-hand side of the blog's screen or click </span></span><a href="http://crescendo-erm.blogspot.co.uk/" style="color: #7d171d; text-decoration-line: none;"><span style="background: white;">here</span></a><span style="color: #333333;"><span style="background: white; color: black;">.</span></span></i></b></font></p>
<p class="MsoNormal"><font size="2"><br /></font></p><div>
<hr align="left" size="1" width="33%" /><p class="MsoNormal"><font size="2">* This post is based on my contribution to a virtual panel discussion organised by ActuarTech on <a href="https://us02web.zoom.us/webinar/register/WN_fKMunUM9SBeuCnO6f2wQEw">AI Governance & Risk Management</a>.<o:p></o:p></font></p><div><font size="2"><a href="file:///C:/Users/isaac/Google%20Drive/Cloud/Crescendo%20Advisors/Development/Topics/AI/Blog/Business%20choices%20and%20AI%20v01.docx#_ftnref1" name="_ftn1" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span face="" style="font-size: 10pt; line-height: 107%;">[1]</span></span></span></a> Prudential
Regulation Authority (PRA), Algorithmic trading, Supervisory Statement, 5/18,
June 2018.</font></div><div id="ftn1"><p class="MsoFootnoteText"><font size="2"><o:p></o:p></font></p>
</div>
</div></div><div><br /></div>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-86060829552607958442020-02-26T00:08:00.000+00:002020-03-17T15:21:37.740+00:00Good risk management is not just about good ideas <span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<br />
<div class="MsoNormal">
<div class="MsoNormal" style="background: #FEFDFA;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #333333;">One might
say that this is stating the obvious and that it is understood that implementation
also matters. A recent FCA
enforcement </span><a href="https://www.fca.org.uk/publication/final-notices/moneybarn-limited-2020.pdf"><span style="color: #7d171d;">case</span></a><span style="color: #333333;"> against <a href="https://www.moneybarn.com/">Moneybarn</a> would suggest that it is not so
obvious after all. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: #FEFDFA;">
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://1.bp.blogspot.com/-so157S7J_2c/XnDQTdvT_LI/AAAAAAAAFzo/jqzX8Raa5IEa-3fk1oN76yD78ExcsVZ5ACNcBGAsYHQ/s1600/Moneybarn.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="281" data-original-width="500" height="223" src="https://1.bp.blogspot.com/-so157S7J_2c/XnDQTdvT_LI/AAAAAAAAFzo/jqzX8Raa5IEa-3fk1oN76yD78ExcsVZ5ACNcBGAsYHQ/s400/Moneybarn.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<span style="color: #333333; font-family: "arial" , "helvetica" , sans-serif;">Moneybarn
is a lender that provides motor finance for used vehicles to ‘non-standard’
customers.</span><a href="file:///C:/Users/isaac/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/The%20importance%20of%20genuine%20policy%20implementation.docx#_ftn1" style="font-family: arial, helvetica, sans-serif;"><span style="color: #7d171d;">[1]</span></a><span style="color: #333333; font-family: "arial" , "helvetica" , sans-serif;"> </span><span style="color: #333333; font-family: "arial" , "helvetica" , sans-serif;">The case
against them related to the regulatory expectations for treatment of and
communication to customers that fall into financial difficulties, i.e. the
exercise and communication of appropriate forbearance by the
lender. Here, we seek to tease out the implications of this case for the risk management activities of FCA regulated business.</span></div>
</div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="text-indent: -18pt;"><span style="font-family: "arial" , "helvetica" , sans-serif;">1. <u>Appropriate policy
design</u></span></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;">As one would expect, policies need to cover the appropriate
ground.<span style="mso-spacerun: yes;"> </span>This can include articulating
the appropriate range of options (in this case, for customers forbearance and resolution</span><span style="font-family: "arial" , "helvetica" , sans-serif;">), the considerations
that would be taken into account and the governance that would apply to
different options.</span><span style="font-family: "arial" , "helvetica" , sans-serif;"> </span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">It is worth noting that in this enforcement case, it appears
that the FCA had no obvious concerns about the relevant policies and procedures
reviewed. </span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;">2. <u>I</u><u style="text-indent: -18pt;">mplementation</u></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;">The challenge is how these policies and procedures are
translated in the business, e.g. whether the call scripts are consistent with
the policies.<span style="mso-spacerun: yes;"> </span>In some case, this means
that calls would be far from “linear”.<span style="mso-spacerun: yes;">
</span>Customer service agents will have to consider a range of options and
guide the customer.<span style="mso-spacerun: yes;"> </span>This would have
implications for training and tools available for customer service agents.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;">The FCA notes that “from the review of the sample the use of
any other forbearance options”, other than clearing their arrears over a short
period of time, “despite the fact that policies and procedures referred to
other available options”.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<u style="text-indent: -18pt;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></u></div>
<div class="MsoNormal">
<span style="text-indent: -18pt;"><span style="font-family: "arial" , "helvetica" , sans-serif;">3. <u>Monitoring and assurance</u></span></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;">There is usually a combination of first line monitoring and
oversight by 2<sup>nd</sup> and 3<sup>rd</sup> line functions.<span style="mso-spacerun: yes;"> </span>To some extent, who provides assurance
becomes less important than whether assurance is provided.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">It is important to recognise that assurance should be
provided about the processes and about the outcomes.<span style="mso-spacerun: yes;"> </span>Where the nature of the issue involves considering
customers’ individual circumstances in response to financial difficulties, then
it is important to evidence that the range of options set out in the policy
have been delivered.<span style="mso-spacerun: yes;"> </span>This is more
challenging to monitor than following a process.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;">It is interesting that in this enforcement note there are no
references to assurance or to the role of 2<sup>nd</sup> and 3<sup>rd</sup>
line functions.</span></div>
<div class="MsoNormal">
<span style="text-indent: -18pt;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></span></div>
<div class="MsoNormal">
<span style="text-indent: -18pt;"><span style="font-family: "arial" , "helvetica" , sans-serif;">4. <u>Regulatory relationship
management</u></span></span></div>
<div class="MsoListParagraph" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<div class="MsoNormal" style="background: #FEFDFA;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #333333;">The FCA initial
engagement starts with a seemingly low-profile review of a “limited number” of
files and call records leading to a visit in July 2016 to assess forbearance
and termination practices. There were then several interactions with
the FCA in September 2016 and January 2017, leading to a formal request for
imposition of a requirement in June 2017 and eventually enforcement action. One
must wonder if a more proactive engagement with the FCA would have prevented
the escalation to enforcement.</span></span></div>
<div class="MsoNormal" style="background: #FEFDFA;">
<span style="color: #333333; font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal" style="background: #FEFDFA;">
<span style="color: #333333; font-family: "arial" , "helvetica" , sans-serif;">It is
usually noted that proactive engagement with the FCA and the issues raised
would have been expensive. Hindsight may be a powerful tool but it
is not clear that the cost of the proactive engagement would have been unlikely
to exceed the enforcement costs, which ended up being very substantial – the fine of
£2.7m, the impact on senior management’s time, and the £30.3m of compensation
paid to customers potentially affected by these failings. </span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><b style="background-color: white; color: #333333;"><i><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: black;">This post is part of the materials discussed in episode 3 of RegNut Podcast. If you found this post of interest, subscribe to <a href="https://podcast.regnut.com/" target="_blank">RegNut</a>. You can also subcribe to the blog and receive further posts by email. See the box on the right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/" style="background-color: white; color: #7d171d;"><i>here</i></a><b style="background-color: white; color: #333333;"><i><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: black;">.</span></i></b></span><br />
<div>
<b><i><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: black;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></span></i></b></div>
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<span style="font-family: "georgia" , "times new roman" , serif;"><a href="file:///C:/Users/isaac/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/The%20importance%20of%20genuine%20policy%20implementation.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt; line-height: 107%;">[1]</span></span><!--[endif]--></span></span></a>
Non-standard customers are those that cannot access finance from mainstream
lenders because they have a poor or no credit history or past problems with
credit due to unemployment, ill health or other adverse events.</span></div>
</div>
</div>
Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-39632194689207809972020-01-27T21:23:00.000+00:002020-01-27T21:23:07.960+00:00Operational Resilience<br />
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<b style="color: #212121; font-family: Arial, sans-serif; font-size: 12pt;">By Shirley Beglinger, Advisory Board Member, Crescendo Advisors</b></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: #212121; font-family: Arial, sans-serif; font-size: 12pt;"><br /></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: #212121; font-family: Arial, sans-serif; font-size: 12pt;">In today's interconnected financial world,
"organisational resilience" must be taken to mean much more than just
"a fully tested disaster recovery plan". Regulators are requiring
boards to see beyond the walls of their own firm and identify its position in
the economic, IT and service-delivery ecosystem with an emphasis on important
services provided. This is a completely different perspective on risk.</span><span style="color: #212121; font-family: Arial, sans-serif; font-size: 12pt;"> </span><span style="color: #212121; font-family: Arial, sans-serif; font-size: 12pt;">Boards and CROs need to reconsider many tried
and tested risk methodologies and metrics.</span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: #212121; font-family: "Arial",sans-serif; font-size: 12.0pt; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB; mso-hansi-theme-font: minor-bidi;">In reviewing the drivers of potential operational disruption,
the CRO may identify several which are difficult or expensive to address.
"Reliance on legacy infrastructure" for example will likely lead to a
lengthy boardroom discussion of the expense and dangers of IT integration
projects. Supply chains and data sharing quickly lead to the realisation that
even if the firm's own arrangements are top-notch, there are probably other
firms in their ecosystem who may not have the same level of preparedness.<o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: #212121; font-family: "Arial",sans-serif; font-size: 12.0pt; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB; mso-hansi-theme-font: minor-bidi;">Having identified potential sources of disruption,
the board must then quantify potential costs (internal and external) and assess
the ability to recover from severe and plausible scenarios of operational
disruption and compare these with the firm's stated tolerance for operational disruption.
Where necessary, remediation plans must be put in place.<o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: #212121; font-family: "Arial",sans-serif; font-size: 12.0pt; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB; mso-hansi-theme-font: minor-bidi;">While no board member wishes to explain to the
regulator why their firm was the first domino in the ecosystem to fall over,
such far-reaching change needs to be carefully managed. <span style="mso-spacerun: yes;"> </span>To implement these requirements firms will
benefit from a pilot that enables them to develop an understanding of the steps
that would be required.<span style="mso-spacerun: yes;"> </span>This will be
less disruptive and more beneficial than a firm-wide initiative.<o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: #212121; font-family: "Arial",sans-serif; font-size: 12.0pt; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB; mso-hansi-theme-font: minor-bidi;">However, the need to scale up means that firms will
need to identify or acquire in-house "resilience capabilities". A key
aspect of the output from a successful pilot project would be to identify
exactly what capabilities are required and how they can best be embedded within
the firm's business.<o:p></o:p></span></div>
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<span style="color: #212121; font-family: "Arial",sans-serif; font-size: 12.0pt; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB; mso-hansi-theme-font: minor-bidi;"><br /></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<b style="color: #333333; font-family: arial, helvetica, sans-serif; font-size: 13px;"><i><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: black;">If you found this post of interest, you can subscribe and receive further posts by email. See the box on the right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/" style="color: #7d171d; font-family: arial, helvetica, sans-serif; font-size: 13px; text-decoration-line: none;"><i>here</i></a><b style="color: #333333; font-family: arial, helvetica, sans-serif; font-size: 13px;"><i><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: black;">.</span></i></b></div>
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<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-33176266356094426652019-08-01T12:17:00.001+01:002019-08-01T12:17:22.002+01:00ERM in Three Lines*<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span>
<br />
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">One of the challenges with enterprise risk management (ERM) is
how much is written on the subject. </span><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">I find it useful to identify the key components.</span><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"> </span><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">This provides a structure to sort out the detailed views and comments,
though it is also more than that. If you are a busy CRO or senior risk leader, identifying
the key components enables you to take stock and think about challenges and
improvements that may be relevant to your priorities.</span><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"> </span></div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Here is an attempt to sum up ERM and provide that clarity in
three headlines.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoListParagraph" style="margin-left: 17.85pt; mso-list: l1 level1 lfo1; text-indent: -17.85pt;">
<!--[if !supportLists]--><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span></b><!--[endif]--><span dir="LTR"></span><b>A vision of the ERM purpose<span style="mso-spacerun: yes;">
</span><o:p></o:p></b></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0cm; mso-add-space: auto;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0cm; mso-add-space: auto;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">My
preference for financial services is ‘protect and enable’. This highlights that
risk management is more than just about avoiding the downside; it is about how
risk management supports decision making, including the role of the CRO in that
decision making. (More on ‘protect and enable’ and different views from practitioners
shared on Crescendo Advisors’ blog are available <a href="https://crescendo-erm.blogspot.com/p/the-objective-of-risk-management.html">here</a>.)<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 18.0pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraph" style="margin-left: 17.85pt; mso-list: l1 level1 lfo1; text-indent: -17.85pt;">
<!--[if !supportLists]--><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span></b><!--[endif]--><span dir="LTR"></span><b>An articulation of how to deliver and embed ERM in the
business<span style="mso-spacerun: yes;"> </span><o:p></o:p></b></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0cm; mso-add-space: auto;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0cm; mso-add-space: auto;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">This
is your ERM framework, roles and responsibilities, policies, and risk appetite.
They must provide the right balance between the level of detail and clarity to create
a durable product and support business implementation.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 18.0pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraph" style="margin-left: 17.85pt; mso-list: l1 level1 lfo1; text-indent: -17.85pt;">
<!--[if !supportLists]--><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span></b><!--[endif]--><span dir="LTR"></span><b>Evidence of the outcomes of vision and articulation of ERM (1
and 2 above)<span style="mso-spacerun: yes;"> </span><o:p></o:p></b></span></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 0cm; mso-add-space: auto;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 0cm; mso-add-space: auto;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">This
is the outcome of the ERM, i.e. the assurance that is provided to the Board. This
means that a feedback mechanism that supports improvement is in place. This is
partly about risk or thematic reviews, but it also represents a wider
perspective that involves 1<sup>st</sup> line and 3<sup>rd</sup> line as well. I
also find that focusing on assurance is more ‘real’ than a discussion on the
extent to which processes are implemented or embedded.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">At the risk of oversimplifying, here is my own take on the UK
insurance business position on these three aspects</span></div>
<div class="MsoNormal" style="text-indent: 0px;">
</div>
<ul>
<li><span style="text-indent: -18pt;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">The articulation of the ERM
vision is progressing but there is still work to be done. There is a sense that,
broadly speaking, people operate according to the ‘protect and enable’ vision
without articulating it as clearly as it could be. </span></span></li>
</ul>
<ul>
<li><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Good progress has been made
articulating how to deliver and embed ERM in businesses; all businesses have ERM
frameworks and policies in place.<span style="text-indent: -18pt;"> </span><span style="text-indent: -18pt;">Some
are considering external reviews after the frameworks have been in place for
some time. </span></span></li>
</ul>
<ul>
<li><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="text-indent: -18pt;">T</span><span style="text-indent: -18pt;">he biggest challenge ahead
is evidencing ERM implementation and providing structured assurance to the
Board about ERM expectations. This is a challenge for risk management function
(risk reviews?), first line (business and control reviews?) and internal audit
(coordinate with first and second line?).</span><span style="text-indent: -18pt;"> Please get in touch if you want to receive a paper with </span><span style="text-indent: -18pt;">initial thoughts on this challenge.</span><span style="text-indent: -18pt;"> </span></span></li>
</ul>
<br />
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo2; text-indent: -18.0pt;">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Do you agree with views about these views about the insurance sector in the UK?
How about banking and asset management? How is this seen in other countries?</span></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">* No pun intended about the three lines of defence.</span><o:p></o:p></div>
<div class="MsoNormal">
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: #fefdfa; color: #333333; font-family: "arial" , "helvetica" , sans-serif;"><b><i><span style="background: white; color: black;">If you found this post of interest, you can subscribe and receive further posts by email. See the box on the right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/" style="color: #7d171d; text-decoration-line: none;"><i><span style="background: white;">here</span></i></a><b><i><span style="background: white; color: black;">.</span></i></b></span></div>
<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-58165988234803291292019-07-18T15:11:00.000+01:002019-07-18T15:12:33.653+01:00AI and Risk Management<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span><span style="font-family: "arial" , "helvetica" , sans-serif;">Earlier this year, I gave a presentation to a group of actuaries - the Network of Consulting Actuaries - on the challenge of adopting Artificial Intelligence tools in Financial Services and how risk management help. I have transformed the speaking notes into a paper - <a href="https://docs.wixstatic.com/ugd/1a064c_0d5dc579e6744b88a10addccc45337c1.pdf">here</a>. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Happy reading!</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><b style="background-color: #fefdfa; color: #333333; font-size: 13px;"><i><span style="background: white; color: black;">If you found this post of interest, you can subscribe and receive further posts by email. See the box on the right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/" style="background-color: #fefdfa; color: #7d171d; font-size: 13px; text-decoration-line: none;"><i><span style="background: white;">here</span></i></a><b style="background-color: #fefdfa; color: #333333; font-size: 13px;"><i><span style="background: white; color: black;">.</span></i></b></span><br />
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<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-84771414311179903262019-07-04T08:26:00.001+01:002019-08-13T10:57:23.829+01:003+1 Types of Digital Transformations and How to Prioritize Them<br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">A former insurance CEO once said that if you want to
understand risk in financial services, you should start by looking at the
products you are offering. I have been exploring how incumbents in financial
services, and specifically risk management, should change to embrace FinTech. Inevitably
then the subject of ‘digital transformation’ comes up. I have been speaking
with various colleagues and friends recently and I realised that there are rather
different forms of digital transformations with different implications for risk
management and the business. Here is my take on the various types. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span></b><!--[endif]--><span dir="LTR"></span><b>Data-driven</b><o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Someone in the business takes the initiative and starts collating,
curating and using the many data sources in the business to address specific
analytical issues and enhance the quality of decision making.<span style="mso-spacerun: yes;"> </span>This represents a bottom-up transformation
with potential transformational features.<span style="mso-spacerun: yes;">
</span><o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">In this case, buy-in is unlikely to be an issue. The main risk
management challenge may arise from the scaling up of this initiative. For example,
scaling up may involve using external data rather than internal data or
bringing new technology to store the data, e.g. a data lake, which needs to be integrated
into existing systems. It is also important that the consideration of
analytical issues in the business factors in the need to maintain (and enhance,
where necessary) an understanding of the risk profile of the business. For
example, if additional data allows the business to modify its underwriting
approach in a significant way, you should also consider how the (different)
exposures would be monitored. There are a couple of examples <a href="https://crescendo-erm.blogspot.com/2018/09/monitoring-risk-and-business-impact-of.html">here</a>.<o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span></b><!--[endif]--><span dir="LTR"></span><b>Enhancing Customer Journeys</b><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This can be about how customers are serviced, given their existing
journeys, and might
include enhancing the front-end applications or rolling out new IT equipment to
service customers. Alternatively, the transformation may be about changing or
enhancing aspects of customer journeys. This might include, for example, introducing
chat-bots as part of customer journeys (e.g. claims management) or applying an
artificial intelligence-based tool to a specific process (e.g. underwriting).</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This type of transformation has become the most visible form
of digital transformation thanks to the various accelerators that incumbents in
financial services have created. The challenge of buy-in is typically addressed
by specifying that the accelerator should partner external providers with
business leaders for whom the technology may be relevant. The impact on the
risk profile of the business is also dependent on the specific transformation
and should be considered from the outset.<span style="mso-spacerun: yes;">
</span><o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span></b><!--[endif]--><span dir="LTR"></span><b>IT-enabler</b> <o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">There are cases where the legacy systems become the main
challenge and where the adoption of cloud-based services can be part of the
answer. There are several approaches here, ranging from incremental steps to a ‘big-bang’
approach. One interesting idea is focusing on reducing the functionality of the
legacy system and replicating that outside using new technology.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">These transformations may be motivated by concerns about
operational resilience in the short term but might also support the transformations
outlined above and enable more effective risk management.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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</span></span></span></b><!--[endif]--><span dir="LTR"></span><b>Digital ‘Non-transformation’</b>
<o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This involves applying new technologies in the context of a
new product line where there is no transformation as such. This clearly avoids
the transformation in the short term but it can also provide the business with
the means to build confidence in specific technologies (AI, blockchain) and the
capability to execute and bring on board new technologies. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">These types of digital transformations are not mutually
exclusive, but it is important to be clear that they are different. Equally,
they are not substitutes for each other and
the real challenge is prioritising between them. This will inevitably vary between
businesses, though I believe that there are standard considerations shaping the priorities such as the need to change the culture<span style="font-size: 10.6667px;"> </span>in
order to mobilize the business for the digital era and the state of the core IT
infrastructure, including the need to leverage technology as an enabler. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">What do you think about these categories? </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b style="background-color: #fefdfa; color: #333333; font-size: 13px;"><i><span style="background: white; color: black;">If you found this post of interest, you can subscribe and receive further posts by email. See the box on the right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/" style="background-color: #fefdfa; color: #7d171d; font-size: 13px; text-decoration-line: none;"><i><span style="background: white;">here</span></i></a><b style="background-color: #fefdfa; color: #333333; font-size: 13px;"><i><span style="background: white; color: black;">.</span></i></b></span></div>
Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-50396504093351582662019-05-27T21:33:00.000+01:002019-05-27T21:33:39.120+01:00The New and the Old in Risk Management<br />
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<span style="font-family: "arial" , sans-serif;">I
have been writing about the new and the old in risk management over the past
year. This starts with the slow pace of adoption of FinTech by incumbents in
financial services. I have suggested that an important component of the change
needed includes incumbents amending and enhancing risk management frameworks to
reflect new FinTech innovations. (See my </span><a href="https://crescendo-erm.blogspot.com/2019/04/risk-management-as-infrastructure-for.html"><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">last post on
the subject</span></a><span style="font-family: "arial" , sans-serif;">.)</span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">Recently,
I came across </span><a href="https://www.mckinsey.com/business-functions/risk/our-insights/derisking-machine-learning-and-artificial-intelligence"><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">an article from
McKinsey</span></a><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">
that makes a similar point in the context of model risk and the adoption of artificial
intelligence (AI) and machine learning. It turns out I am in good company!<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">McKinsey’s
article notes that banks have developed and implemented frameworks to manage
model risk, including model validation reflecting specific regulatory
frameworks, in this case from the US Federal Reserve (</span><a href="https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf"><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">here</span></a><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">). They recognise
that the implementation of these frameworks is not appropriate to deal with the
model risk associated with AI and machine learning. Banks are therefore proceeding
cautiously and slowly introducing new modelling approaches even when these are
available.<o:p></o:p></span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">The
article then shows how a standard framework for model risk management is used
to identify extra considerations </span><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">required for this
framework to cover appropriately AI and machine learning models. <span style="mso-spacerun: yes;"> </span>The key message is that the challenge of adopting
AI and machine learning can be addressed through a careful consideration of
existing approaches.</span><span class="MsoCommentReference"><span style="font-size: 8.0pt; line-height: 107%;"><span style="mso-special-character: comment;"> </span></span></span><span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;"> <o:p></o:p></span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;"><br /></span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">Two
further thoughts from McKinsey’s article. Firstly, the article rightly refers
to model management rather than validation. It is always useful to reiterate
that model validation undertaken by the risk function is just a component of
how models are managed in the business. Secondly, model management should not
apply only to internal models used to calculate regulatory capital, but should
apply more widely to models used in the business such as those used for
pricing, valuation of assets and liabilities. <o:p></o:p></span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;"><br /></span></div>
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<span style="font-family: "arial" , sans-serif; mso-ascii-theme-font: minor-bidi; mso-bidi-theme-font: minor-bidi; mso-hansi-theme-font: minor-bidi;">The
article ends with a cautionary tale of an unnamed bank where the model risk
management function took initial steps to ready itself for machine learning
models on the assumption that there were none in the bank. It then discovered
that an innovation function had been established and was developing models for
fraud detection and cybersecurity. <o:p></o:p></span></div>
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<b><i><span style="background: white; color: black; font-family: "arial" , sans-serif;">If you found this post of interest,
you can subscribe and receive further posts by email. See the box on the
right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/"><i><span style="background: white; color: #7d171d; font-family: "arial" , sans-serif;">here</span></i></a><b><i><span style="background: white; color: black; font-family: "arial" , sans-serif;">.</span></i></b></div>
Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-83564698483597018872019-04-29T07:49:00.001+01:002019-04-29T14:30:16.784+01:00The Curse of Risk Appetite<br />
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In this post, I go back to one of the fundamental aspects of an ERM framework:
risk appetite. ‘The Curse of Risk Appetite’ is part of the title of an
interesting paper reviewing the misuses of risk appetite.<a href="file:///C:/Users/isaac/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/The%20curse%20of%20risk%20appetite%20v02.docx#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: black; font-size: 11pt; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></a>
Some of the misuses described in the paper might sound familiar, but perhaps
the key point to take away from the paper is that there is a potential for risk
appetite to become synonymous with ‘a consideration of risk’. I am not sure
this was ever the intention.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Courier New";"><span style="font-family: "arial" , "helvetica" , sans-serif;">The paper includes
several useful suggestions to enhance risk appetite. They are focused on the
long-run value of the firm and on the structure of risk appetite statements, reflecting
a view that risk is the likelihood of falling below critical levels of
performance. However, my attention was really caught by the authors’ suggestion
to improve the organisational process for risk management. They suggest that a risk
function’s role should be defined to include responsibility for evaluating the
combined effect of strategic initiatives and capital budgeting on the firm’s
overall risk profile.<o:p></o:p></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Courier New";"><span style="font-family: "arial" , "helvetica" , sans-serif;">On one level, this
prescription is consistent with the view that the aim of the risk function should
be to ‘protect and enable’, with the emphasis on the ‘enable’ aspect which
sometimes gets overshadowed by ‘protect’. I am attracted to this suggestion
because it turns a vision into a practical requirement that can be incorporated
into an articulation of roles and responsibilities for a CRO or risk function.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Courier New";"><span style="font-family: "arial" , "helvetica" , sans-serif;">If, however, this was
implemented literally in UK financial services, I suspect there would be an
issue with regulators’ expectation about the independence of the risk function (second
line of defence) from the business (first line).<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
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<br /></div>
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<span style="color: black; mso-bidi-font-family: "Courier New";"><span style="font-family: "arial" , "helvetica" , sans-serif;">A similar outcome could
be reached by clarifying that the role of the CRO/risk function includes
providing a risk opinion in the early stages of the consideration of major
strategic initiatives that have the potential to alter the business’s risk
profile. The emphasis on timing is important. Providing a risk opinion only
when major strategic initiatives are presented for approval is unlikely to add
value. A CRO/risk function opinion in the early stages is likely to support
consideration of the details of the initiatives and how they can be shaped to
strike the appropriate balance between risk and return. <o:p></o:p></span></span></div>
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<br /></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b><i><span style="background: white; color: black;">If you found this post of interest,
you can subscribe and receive further posts by email. See the box on the
right-hand side of the blog's screen or click </span></i></b><a href="http://crescendo-erm.blogspot.co.uk/"><i><span style="background: white; color: #7d171d;">here</span></i></a><b><i><span style="background: white; color: black;">. <o:p></o:p></span></i></b></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="file:///C:/Users/isaac/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/The%20curse%20of%20risk%20appetite%20v02.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 10pt; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></span></a><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> <span style="background: white;">Alviniussen, Alf and Jankensgård, Håkan, </span></span><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3174591"><span style="background: white; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The Risk-Return Tradeoff: A Six-Step Guide to Ending the Curse of Risk
Appetite</span></a><span style="background: white; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> (May 7, 2018). </span><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> <o:p></o:p></span></span></div>
</div>
</div>
<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-46349807698808431482019-04-03T09:26:00.001+01:002019-04-03T09:26:25.579+01:00Risk Management as Infrastructure for Artificial Intelligence and FinTech<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">During 2018, I wrote several posts about FinTech, Artificial
Intelligence (AI) and risk management. I
was kindly invited to present to the Network of Consulting Actuaries, I chose
to use this opportunity to consolidate my views on the subject. </span><br />
<span style="font-family: arial, helvetica, sans-serif;"><br /></span>
<span style="font-family: arial, helvetica, sans-serif;">There were several ideas flowing through my mind.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Firstly, informal evidence suggests that, for all the hype,
FinTech and AI have not yet become mainstream in insurance or in financial
services more generally.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Secondly, the largest business transformation arising from
FinTech and AI is the adoption of these technologies by incumbents. Indeed, I explored this in the context of
banking through the group project at the Oxford FinTech Programme I completed
in December 2018.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Thirdly, someone who works for a multinational insurer made
the observation during an InsurTech event in London that as a regulated entity,
the insurer has responsibilities and obligations towards their customers and must
follow due process before they roll out new technologies. There was a hint of an apology in this
observation to the nimble start-ups in the audience. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Putting all these thoughts together led me to see the main
challenge to the adoption of FinTech by incumbents as governance, including how
risk management is applied in practice.
If the aim of risk management is to ‘protect’ or block, then the
incumbent does not have an obvious lever to support the introduction of AI
tools and FinTech. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">If, on the other hand, the aim of risk management is
perceived as to ‘protect and enable’, then risk management can be part of the
solution. Risk management can lead to the
creation of necessary infrastructure to ensure that AI tools achieve their
transformational potential. This
includes articulating a vision of how a control framework should be leveraged,
considering the impact of FinTech and AI on risk management frameworks,
focusing on explainable AI, and articulating the implications for the target
operating model. This will facilitate
incumbents’ adoption of FinTech and AI. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Take a look at the presentation I gave (<a href="https://docs.wixstatic.com/ugd/1a064c_ab18c18b68ec4ee6b744914a4d0967c2.pdf">here</a>)
for a more detailed articulation of these points.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<b style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px;"><i><span style="color: black;">If you found this post of interest, you can subscribe and receive further posts by email. See the box on the right-hand side of the screen or click </span></i></b><span class="MsoHyperlink" style="background-color: white; color: #333333; font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13px;"><i><a href="http://crescendo-erm.blogspot.co.uk/" style="color: #7d171d; text-decoration-line: none;">here</a></i></span><b style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px;"><i><span style="color: black;">. </span></i></b><br />
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Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-85477092453959696792018-11-23T15:44:00.000+00:002018-11-25T18:45:42.984+00:00Integrating Artificial Intelligence in Risk Governance in Financial Services<div class="MsoNormal">
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I have written a number of articles about the interaction
between artificial intelligence (AI) and governance and risk management. My latest piece highlighted the impact that
AI tools can have on a firm’s risk profile (<a href="https://crescendo-erm.blogspot.com/2018/09/monitoring-risk-and-business-impact-of.html" target="_blank">here</a>). I am in the process of gathering my thoughts
on how to <span style="background: rgb(254, 253, 250);">provide for the ongoing and
timely monitoring of AI-based tools, including their integration in
business governance and risk management in financial services.<o:p></o:p></span></div>
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<br /></div>
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<span style="background: rgb(254, 253, 250);">While
reading on the subject (and keeping up with the pace of the Oxford FinTech
Programme), I came across a succinct and interesting paper from Singapore’s
Monetary Authority (<a href="http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Monographs%20and%20Information%20Papers/FEAT%20Principles%20Final.pdf" target="_blank">here</a>) that articulates how the principles of fairness,
ethics, accountability and transparency can - and should - be applied to promote the use of AI
in the financial sector. <o:p></o:p></span></div>
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The paper highlights four useful points for senior
management and Boards considering the strategic use of AI-based tools.</div>
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1. It is important to invest time and effort
understanding and monitoring the decision making of AI based tools – i.e. do
not regard AI-based tools as black boxes. </div>
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<span style="text-indent: -18pt;"><br /></span></div>
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<span style="text-indent: -18pt;">2. AI decisions are subject to the same ethical
standards that apply to decisions made by staff – i.e. if AI-based tools
purport to make decisions as humans would, but without their ‘feelings’, they should
be scrutinised like humans.</span></div>
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<span style="text-indent: -18pt;"><br /></span></div>
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<span style="text-indent: -18pt;">3. Governance has an important internal element not
just an external one - i.e. firms should not rely on regulatory initiatives to support
them delivering appropriate outcomes.</span></div>
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<span style="text-indent: -18pt;">4. The use of AI-based tools is transparent to
consumers in terms of their use and outcomes – i.e. while there are limits to
explanations that can be provided this cannot be dismissed altogether.</span></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 18.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<o:p></o:p></div>
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The paper also includes a number of practical illustrations
that highlight the principles identified.<o:p></o:p></div>
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<br /></div>
All in all this paper represents a useful starting point for
firms to consider how they can equip themselves to benefit from the opportunities that AI technology offers for their businesses.<br />
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<o:p></o:p></div>
<br />
<b style="background-color: white;"><i style="mso-bidi-font-style: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">If you found this post of interest, you may want to subscribe and receive further posts by email. See the box on the right-hand side of the screen or click </span></i></b><span class="MsoHyperlink" style="background-color: white;"><i style="mso-bidi-font-style: normal;"><span style="mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><a href="http://crescendo-erm.blogspot.co.uk/">here</a></span></i></span><b style="background-color: white;"><i style="mso-bidi-font-style: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">. </span></i></b>Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-55043086453560135492018-10-10T19:28:00.000+01:002018-10-10T19:28:06.036+01:00This Time is Different - The Digital Revolution<span style="color: black; font-family: "arial" , "helvetica" , sans-serif;">The August issue of Central Banking, a journal, includes my review of a book about the digital revolution by Chris Skinner. It is a fascinating book that can change pre-determined views. You can</span><span style="font-family: "arial" , "helvetica" , sans-serif;"> read the review <a href="https://www.centralbanking.com/central-banks/financial-stability/3695031/book-notes-digital-human-by-chris-skinner" target="_blank">here</a> </span><span style="font-family: "arial" , "helvetica" , sans-serif;">or below.</span><br />
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<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<b style="mso-bidi-font-weight: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">This Time Is Different: A book review
of <i>Digital Human</i> by Chris Skinner, Marshall Cavendish (2018)<o:p></o:p></span></span></b></div>
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<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Mr
Skinner has written two books on FinTech and banking (<i>Digital Bank</i> and <i>ValueWeb</i>),
and now <i>Digital Human</i> is his third. This represents an opportunity to take
a step back and consider some of the bigger questions about FinTech. How much
of a change could this represent for banking? For financial services? For
society?<o:p></o:p></span></span></div>
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<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">His
main argument is that digitalisation has reduced the cost associated with a
minimum viable product beyond recognition for nearly anything in financial
services. One way of looking at FinTech is as ‘one big bucket of finance and
technology’ with a range of technologies from InsurTech (based on artificial
intelligence) to digital currencies, with mobile wallets and peer-to-peer
lending in between. Indeed, one could make the argument that it should be called
‘TechFin’ instead. However, it is possible to make overall sense of these technologies
by distinguishing between those that challenge existing business structures and
those that create new ones.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">One
of the main aspects of the digital revolution with respect to banking is the
differential effect between the (developed) West and developing world. Surprisingly,
it is not in the direction you might expect. For the West overall, FinTech
represents a challenge to existing business structures. Current IT systems took
shape in the 1970s and 1980s at a time when now-ubiquitous ATMs were first introduced.
While the front-ends of these systems have changed over time, the core
architecture has not. As Mr Skinner points out, CEOs invest significantly in
systems maintenance to pass on to the next CEO rather than overhauling
technology. I was left wondering if this might also be a reflection of
misplaced risk aversion that contributes to the relatively short tenure of CEOs.
<o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">There
also seems to be a potentially systemic issue arising from the natural ageing
process of the programmers who can still write code in the language of the
legacy systems (COBOL). Mr Skinner observes that more than 50% of COBOL programmers
are over 45 years old, so the challenge of maintaining legacy systems is not
going to get any easier.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">However,
the real challenge does not seem to be adopting new technologies but the
vertically integrated business model of banking or, as Mr Skinner puts it
rather eloquently, being ‘control freaks in a proprietary operation building
everything themselves’. <span style="mso-spacerun: yes;"> </span>As usual,
technology enables the challenge but does not help the incumbent figure out how
the business model should evolve and how to remain profitable. Mr Skinner offers
two suggestions. The first is leveraging on its capital, history and brands and
repositioning the business as a trusted party that can select specialised
providers, like Amazon Marketplace. The second is leveraging on the data and
focusing on advice and data analytics.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Indeed,
there seems to be a change in emphasis in FinTech. Between 2010 and 2014, the focus
was on disrupting existing banking business models and unbundling. Since 2014,
the focus has shifted to collaboration with more dynamic banks leveraging on
their customers’ reach and capital.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Perhaps
the key point to emphasise is that the regulatory framework has already adapted
to some extent, at least in the EU where Open Banking is already a reality because
of EU directives.<span style="background: yellow; mso-highlight: yellow;"><o:p></o:p></span></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">If
you don’t work full time in FinTech, it is difficult to form an impression
about how far these trends could go. <span style="mso-spacerun: yes;"> </span>(Yes, I know there are forecasts, but they are
merely forecasts.) This is where the other part of the book is particularly
useful. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">In
the developing world, banking tends to be restricted to affluent clients. . FinTech
does not challenge major incumbents; rather, it represents more of a
development opportunity. FinTech allows for servicing relatively small transactions
(by Western standards) which is compensated through a relatively large number
of transactions. In this way, financial inclusion becomes a business and stops
being a form of charity. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Mr
Skinner illustrates extensively how far and deep these trends are going. In sub-Saharan
Africa, mobile banking and e-wallets lead with the overall number of accounts
growing fivefold between 2011 and 2016, reaching around 275 million accounts
out of 420 million mobile subscribers. Interestingly, use is not evenly spread.
Institutional design continues to matter even in the age of FinTech. In some
countries, these developments are led by mobile network operators and in others
by banks. Some countries actively encourage partnership and agreements to
enable domestic and cross-border money transfers cheaply.<o:p></o:p></span></span></div>
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<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">This
is not just a matter of convenience. If you cannot get paid reliably and must
rely on cash, there is a limited number of business opportunities that can
thrive. The case study of China’s Ant Financial is therefore fascinating. It
starts with a problem of trust between buyers and sellers that limits the
development of the e-commerce that evolved into what we call now electronic
payments. One of the lessons of this is really about the central role that the
consumer plays. The business scale is staggering: in 2016, the value of
transactions in the peak day (called Singles’ Day) was double the amount
transacted on the US’s Thanksgiving Day, Black Friday and Cyber Monday
together. It’s not just payments, as there seems to be an emerging pattern that
starts with electronic payments and moves to managing money, and Ant’s money
market fund is already larger than JP Morgan’s US Government money market fund.<o:p></o:p></span></span></div>
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<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "arial" , "helvetica" , sans-serif;">And
what about society? Living longer, 3D printing, the Internet of Things and conquering
space may well change how we live. I am sure you have heard before the old
dictum that this time is different. Perhaps this time it is indeed, if only for
banking because of FinTech.</span></span></div>
Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-32951650100550669022018-09-16T13:29:00.000+01:002018-11-04T21:37:23.418+00:00Monitoring the Risk and Business Impact of AI-Based Solutions<br />
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">AI-based
solutions can shape how financial services businesses make money, whether the
business model is the same or not. For an existing financial services business,
the motivations may vary and range from efficiency to expanding the business. There
would be project risk as with any development, but leaving that important
consideration aside, it is worth bearing in mind that AI-based solutions would
also impact the risk profile of the business. This may or may not be the
original intention, but it becomes more likely. The key implication is that
implementing an AI-based solution would require a radically different risk
oversight approach by the business.<o:p></o:p></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Standard
computer algorithms which are not AI-based can</span><span style="color: black; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">—</span><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">and do</span><span style="color: black; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">—</span><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">solve complex problems. The main feature of such
algorithms is that the problem is somehow defined and an algorithm developed to
solve it which will produce the same answer as long as the same inputs are
provided. So a credit-scoring mechanism calibrated to capture a certain type of
client gives you just that.<o:p></o:p></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><br /></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">The
answers offered by an AI-based system may change over time. New data is used to
reassess the underlying relationships and recalibrate the relationship between
the target variable and the potential explanatory variables. This “learning”
can also happen in a standard programme when there is a process of
recalibration. The difference is that in the case of AI, learning would happen
on a real-time basis</span><span style="color: black; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">—</span><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">that’s
the essence of AI.<o:p></o:p></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Alternatively,
with AI a target variable may not have been defined. That’s not as unusual as
it might sound. For example, algorithms assessing a loan or credit card
underwriting may fall in this category because there is no single rule to
predict a borrower’s likelihood of repayment. New data can lead to a certain
recalibration or can be used to identify new relationships between certain
data. For example, over time an AI-based system might identify that outstanding
debt is a better predictor of the likelihood of borrower repayment than repayment
history and penalise someone with a relatively good track record of timely repayments.<o:p></o:p></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><br /></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">The
first type of AI-based solution is called “supervised machine learning” and the
second one “un-supervised machine learning”. The key difference is the extent
of autonomy that goes with the learning.<o:p></o:p></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><br /></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Consider
the potential impact on conduct risk of AI-based tools. One of the expectations
from Treating Customers Fairly (TCF) with respect to product governance is that
they are designed to meet the needs of identified consumer groups and are
targeted accordingly. This requires a clear business strategy, including
identification of the target market through a combination of qualitative and quantitative
research and oversight of the business to ensure that it is aligned with
initial expectations of customers and business generated. Take the example of
automated investment services covered in a recent </span><a href="https://www.fca.org.uk/publications/multi-firm-reviews/automated-investment-services-our-expectations"><span style="mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">FCA review</span></a><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">. These providers would rely on some type of
AI-based solution, whether supervised or unsupervised machine learning. The
possibility of capturing different customers or the advice generated being
different from what was envisaged cannot be ruled out. The challenge is how to
put in place a monitoring approach which ensures that outcomes and risks which arise
are consistent with the expectations in the business plan.<o:p></o:p></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><br /></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Something
similar can apply from the perspective of credit risk, impacting the quality of
the portfolio and performance. Suppose you have been targeting retail customers
with a specific risk rating for a credit card business. If you roll out an
AI-based solution to enhance the efficiency of product underwriting, you would
need to have in place mechanisms to ensure that the credit quality of the
portfolio is consistent with your expectations</span><span style="color: black; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">—</span><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">or else change those expectations. Both options are
fine. You may want to keep your target credit rating constant and seek more
volume, or perhaps you see AI-based solutions as a more robust tool to support
decision making and, in a controlled manner, can relax your target rating.
Regardless of your choice, you would need to put in place a credit risk
monitoring approach that is suited to the new AI-based solutions, as well as
ensure that the business understands the portfolio implications of “learning”
that is at the core of an AI-based solution system.<o:p></o:p></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><br /></span></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">The
salient point to take away is that the roll-out plan of AI-based tools may
focus on the launch. However, the greatest challenge may well be the need to
provide for the ongoing and timely monitoring of the AI-based tools and their
integration in business governance and risk management, which I will cover in
the next post.<o:p></o:p></span></span></div>
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<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-23168243731611743712018-07-25T22:04:00.001+01:002018-07-25T22:04:29.770+01:00Artificial Intelligence (AI) – Fear or Uncertainty?<br />
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">During
the Q&A session at a recent panel discussion on FinTech, some people in the
audience spoke openly about the fear of AI. This appeared to be driven by the
potential impact of AI on jobs. Technological progress has often led to changes
in the labour market, destroying and also creating new jobs. Who knew a web designer
25 years ago?<o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">A
lesson I take from world events and other experiences is that dismissing
people’s fears about AI (or anything else, for that matter) is not usually an
effective strategy. Unfortunately, I do not have a crystal ball to predict the
future or provide reassurance. Instead, I thought I would take the hard road and
write something about the genuine uncertainty that exists about the progress of
AI and its potential value.<o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">It
is useful to start by taking a step back and thinking about the key aspects of
AI tools. The main purpose of these AI tools is to make predictions about the
future based on historical data and their underlying correlations. If you have
been trained in economics, building models that employ data to generate
predictions that support decision making is nothing new. <o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">AI,
however, is different because advances in computer technology facilitate real-time
predictions based on an extended range of data sources, including data originating
from social media, text and many devices. Not surprisingly, these enhanced
capabilities can uncover dependencies and correlations that might not have been
visible to the naked eye or with more traditional research methods or data
sources. It is worth noting at this point that despite its progress, AI shares
with more traditional research methods the challenge of distinguishing between
correlation and causation.<o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Progress
in computing brings with it the ability to build decision-making tools that
transform predictions into actions that can be executed without human
intervention. The simplest and most ubiquitous example is predicting the
correct spelling <i>as you type</i>. An example in FS would be any AI tool that
forecasts an individual’s or corporate creditworthiness, then offers a product
with no human intervention. However, predictions will remain predictions. <o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">Another
source of uncertainty about the impact of AI is the breadth of these tools. So
far, AI tools have been confined to what is usually described as “narrow”
activities, such as the two examples above. The possibility of material
employment substitution comes with what is called general artificial
intelligence that operates in broader settings. There has been progress moving
from these narrow settings, one example being Google’s AI tool which beat the
world champion of the board game, Go. However, a breakthrough in which that gives
rise to general artificial intelligence still remains undiscovered. There are
different views about how close we may be to reaching that point, but the
reality is that no one knows. In the end, does it really matter if the world will
be very different in 100 years?<o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">At
the same time, it is worth remembering that in an increasingly complex and
interdependent world, enhanced predictions can benefit everyone, for example by
preventing diseases and helping people enjoy work more. There are countless
stories of this. The latest one I have come across (<i>The Economist</i>, “<a href="https://www.economist.com/business/2018/07/14/law-firms-climb-aboard-the-ai-wagon">Diligence
Disrupted</a>”, 12 July 2018) relates to the challenge of legally reviewing a huge
number of documents as part of due diligence or preparation for court. This is
a labour-intensive activity that usually represents a significant cost hurdle.
AI tools (and there are many) play a triage role, scanning the many documents
searching for specific clauses, specific aspects of clauses, or their absence.
These then allow lawyers to conduct a focused review and legal diligence,
resulting in greater job satisfaction and, potentially, cost savings for the
client. As the article notes, the net impact on employment remains unclear. However,
lower fees could lead to higher demand requiring more lawyers.<o:p></o:p></span></div>
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<span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">So
there is uncertainty about the impact of AI tools and a fair amount of benefit
to society that can be derived before that uncertainty is resolved. This does
not mean that progress with AI will always be smooth; like any other tool, AI
tools can be misused intentionally or unintentionally. This is where applying
governance and risk management to AI tools would generate value, but I will
leave that discussion for another post.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">If you found this post of interest, you may want to subscribe and receive further posts by email. See the box on the right-hand side of the screen or click </span></i></b><span class="MsoHyperlink"><i style="mso-bidi-font-style: normal;"><span style="mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><a href="http://crescendo-erm.blogspot.co.uk/">here</a></span></i></span><b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">. </span></i></b></div>
Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-773479228292922222018-06-25T19:24:00.002+01:002018-07-04T00:12:36.598+01:00An FCA Enforcement Case Or an Example of Board Maturity?<br />
<span style="background-color: white;">The FCA issued an enforcement action recently against the CEO of Barclays –– as a result of the CEO’s attempt to identify a whistle-blower. (Click</span><span style="background-color: white;"> </span><a href="https://www.fca.org.uk/publication/final-notices/mr-james-edward-staley-2018.pdf" style="background-color: white;">here</a><span style="background-color: white;"> </span><span style="background-color: white;">for the FCA enforcement notice and</span><span style="background-color: white;"> </span><a href="https://docs.wixstatic.com/ugd/1a064c_3db67ea4afc74f73850629ca4a21f232.pdf" style="background-color: white;">here</a><span style="background-color: white;"> </span><span style="background-color: white;">for a short summary of the facts of the case.) There have been impassioned comments about the appropriateness of the FCA’s response, i.e. a fine imposed on the CEO. However, I would like to focus on something else.</span><span style="background-color: white;"> </span><span style="background-color: white;"> </span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">One of the most
revealing aspects of FCA enforcement cases is how the issue comes to the FCA’s
attention. Typically, FCA supervision or thematic work would identify serious
shortcomings in a firm that lead to enforcement action. This one was rather
interesting because there was none of that. </span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">There was an internal
investigation of the anonymous letters by Group Compliance which was formally
closed on 9 January 2017. The FCA explained that “early in 2017”, the Board
became aware of the CEO’s attempt to identify the whistle-blower and that after
conducting its own investigation, the Board decided to refer the CEO to the
FCA. Can you imagine this ten or twenty years ago? Unlikely, I would say.</span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">There are a number of
interpretations one could advance. However, I am inclined to see this as evidence
of the significant progress made in corporate governance in recent years and of
the maturity boards can achieve in the appropriate environment. I can guess that
it may not have been easy for Barclays’ board to refer the CEO to the regulator,
but who said that being a board director would be easy?</span><br />
<span style="background-color: white;"><br /></span>
<br />
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<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">If you found this
post of interest, you may want to subscribe and receive further posts by email.
See the box on the right-hand side of the screen or click </span></i></b><span class="MsoHyperlink"><i style="mso-bidi-font-style: normal;"><span style="mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><a href="http://crescendo-erm.blogspot.co.uk/">here</a></span></i></span><b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="color: black; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">. <o:p></o:p></span></i></b></div>
<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-82107053650728140072018-06-06T18:40:00.000+01:002018-06-06T18:40:47.966+01:00Why should we consider artificial intelligence (AI) from a risk management perspective?<br />
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<span style="font-family: "georgia" , "times new roman" , serif;">I have been reading about AI in financial services and
thinking about it from a risk management perspective. What is there to be
gained from this? </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;"><o:p></o:p></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">AI, like computers and other innovations, is a general
purpose technology. One of the insights from <a href="http://timharford.com/">Tim
Harford</a> , economist and journalist, about the impact of this type of innovation
is that sometimes it takes time for innovations to have an impact because
people do not immediately change the mindset associated with the previous
technology. The main example he provides of this time lag is electricity. Following
his invention of the light bulb in the late 1870s, Edison built electric power
stations in 1881 in the US, and within a year electricity was available as a
commodity. Yet as late as 1910, when electric motors had more to offer, manufacturing
still relied on steam power. You can read about this <a href="http://www.bbc.co.uk/news/business-40673694">here</a>. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">I found Tim’s explanation for this conundrum compelling. Steam-powered
factories were arranged in a specific form to benefit from the single steam
engine through a central drive shaft that ran through the factory. <span style="mso-spacerun: yes;"> </span>Initially, owners changed the source of power
to electricity but to fully benefit from it, factories had to be rearranged according
to a different logic. In addition, rearranging factories gave workers more
autonomy and flexibility, and the way staff was recruited, trained and paid had
to change as well. As a result, adopting electricity meant much more than simply
substituting one source of power for another and the pace of adopting
electricity was slow. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">I think this analogy might be relevant in applying AI to
financial services. AI offers a new way of powering decision making in
businesses. The example of replacing steam power with electricity suggests that
to get the full value of AI, financial services need to think about AI as more
than enhancing or substituting for existing tools. Risk management requires a broader
perspective to support decision making and achieve business objectives.<span style="mso-spacerun: yes;"> </span>I would hope that considering AI from this
perspective would help financial services business to fully benefit from AI.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">You can also help by submitting questions about AI from the
perspective of risk management and governance. Send your questions by email (<a href="mailto:isaacalfonblog@gmail.com">isaacalfonblog@gmail.com</a>) or leave a
comment.<span style="mso-spacerun: yes;"> </span>I am not sure I will have
answers, but who knows?</span></div>
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<span style="background-color: #fefdfa; color: #333333; font-family: "georgia" , "times new roman" , serif; font-style: italic; font-weight: 700;">If you found this post of interest, you may want to subscribe and receive further posts by email – see box on the right hand side of the screen or click </span><a href="http://crescendo-erm.blogspot.co.uk/" style="background-color: #fefdfa; color: #7d171d; font-family: georgia, "times new roman", serif; font-style: italic; font-weight: 700; text-decoration-line: none;">here</a><span style="background-color: #fefdfa; color: #333333; font-family: "georgia" , "times new roman" , serif; font-style: italic; font-weight: 700;">. </span></div>
Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-38236293492735406962018-05-24T22:00:00.001+01:002018-06-24T15:34:50.394+01:00Artificial Intelligence (AI) and the Board Risk Committee<br />
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<span style="font-family: "georgia" , "times new roman" , serif;">The purpose of risk management in financial services is
usually defined as to ‘protect and enable’.
The ‘protect’ dimension can refer to the franchise value of the business
but is mainly about protecting from regulatory intervention. ‘Enable’ has a
perspective of value (however defined) and achievement of company objectives.
(Click </span><a href="http://crescendo-erm.blogspot.co.uk/2013/11/a-30-second-elevator-pitch-on.html" style="font-family: georgia, "times new roman", serif;">here</a><span style="font-family: "georgia" , "times new roman" , serif;">
to read more about ‘protect and enable’.)</span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">AI-based solutions, leveraging on vast amounts of data, are already
a reality in the world of financial services, and these solutions are only
likely to become more prevalent in the next ten years. What are the
implications of AI developments for a Board Risk Committee? <o:p></o:p></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">The simple ‘protect and enable’ approach suggests a number
of points for discussion:</span></div>
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<ul>
<li><span style="font-family: "georgia" , "times new roman" , serif;">How would your company evidence that AI systems comply
with relevant legislation, e.g. non-discriminatory laws?</span></li>
</ul>
<ul>
<li><span style="font-family: "georgia" , "times new roman" , serif;">How would the wider data needs of AI system cope
with data protection legislation? What about the so-called ‘right of
explanation’? What would be the impact of these wider data needs on
cyber-security?</span></li>
</ul>
<ul>
<li><span style="font-family: "georgia" , "times new roman" , serif;">What is the business purpose of introducing an AI
system? Does the business seek to enhance operational efficiencies? Does it aim
to enhance business performance? How would you ensure that this purpose is
achieved? </span></li>
</ul>
<ul>
<li><span style="font-family: "georgia" , "times new roman" , serif;">What would be the operational impact of the
deployment of specific AI tools in the business? Would it also alter the
overall risk profile of the business? The profile of certain risks?</span></li>
</ul>
<ul>
<li><span style="font-family: "georgia" , "times new roman" , serif;">What are the implications for risk governance, the
risk management function and other oversight functions?</span></li>
</ul>
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<span style="font-family: "georgia" , "times new roman" , serif;"><o:p></o:p></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">These are not simple questions that can be covered in a meeting
of the Risk Committee. In some cases, the answer to the questions may not be
clear-cut. For example, an AI-based
underwriting system can be deployed to enhance business performance or to seek
operational efficiencies. In other cases, addressing some of the issues would
require the development of appropriate monitoring systems rather than a
point-in-time consideration.</span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">However, it is also worth bearing in mind that unless you operate
in a start-up business, there would be a fair amount of technology available which
would not necessarily be based on AI, and can be applied to improve existing business
processes and reflect a (more) customer-centric perspective. </span><span style="font-family: "georgia" , "times new roman" , serif;"> </span><span style="font-family: "georgia" , "times new roman" , serif;">So perhaps the main question about AI systems
is really whether there is an adequate understanding of technology in the
business to ensure that AI is the appropriate technology.</span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;">So where should a Risk Committee start? </span><span style="font-family: "georgia" , "times new roman" , serif;"> </span><span style="font-family: "georgia" , "times new roman" , serif;">It may be useful to think about this as
discussions outside the usual calendar of the Risk Committee meetings and
develop a programme that consider these over time.</span></div>
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<span style="font-family: "georgia" , "times new roman" , serif;"><span style="background-color: #fefdfa; font-style: italic; font-weight: 700;">If you found this post of interest, you may want to subscribe and receive further posts by email – see box on the right hand side of the screen or click </span><a href="http://crescendo-erm.blogspot.co.uk/" style="background-color: #fefdfa; color: #7d171d; font-style: italic; font-weight: 700; text-decoration-line: none;">here</a><span style="background-color: #fefdfa; font-style: italic; font-weight: 700;">. </span></span></div>
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<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-86466894962917480822018-05-14T00:21:00.001+01:002018-05-14T00:21:31.560+01:00Lessons from Bank Recovery and Resolution<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: black;">The
latest issue of the Central Banking Journal includes my review of a book about
the Euro Crisis in Cyprus written by Panicos Demetriades, who was Governor of
the Central Bank of Cyprus at the time.<span style="mso-spacerun: yes;">
</span>It is an fascinating book with insights about the challenge of bank
recovery. <span style="mso-spacerun: yes;"> </span> You can</span><span style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-spacing: 0px;"> read the review </span><a href="https://www.centralbanking.com/central-banks/governance/accountability/3439341/book-notes-a-diary-of-the-euro-crisis-in-cyprus" style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-align: start; widows: 2; word-spacing: 0px;" target="_blank"><span style="color: black; text-decoration: none;">here</span></a><span style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-spacing: 0px;"> or below.</span><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="color: black; font-family: Arial, Helvetica, sans-serif;">Book Review: <i>A
Diary of the Euro Crisis in Cyprus: Lessons for Bank Recovery and Resolution</i>
by Panicos Demetriades, Palgrave McMillan, 2017<o:p></o:p></span></b></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">This book is about Panicos Demetriades’ tenure as Governor
of the Central Bank of Cyprus between May 2012 and April 2014. It covers the
banking crisis that hit Cyprus, the banks’ resolution and the wider lessons
learned from the event. Reading this book felt in some ways like a simultaneous
reading of Gabriel Garcia Marquez’s novel, <i>Chronicle of a Death Foretold</i>,
and an economics-based thriller like <i>Murder at the Margin</i> by Marshall
Jevons.<o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">The book begins with Demetriades’ appointment as
Governor of the Central Bank of Cyprus. You know from the beginning how it ends:
Demetriades resigns as Governor. This is a manifestation of the challenge that Central
Bank independence represents; banking resolution is the specific context in
which the Central Bank’s independence is tested. In fact, writing this sentence
already reveals one of the underlying issues: the only feature of Central
Banks’s independence enshrined in European treaties is the independence of the Governor
of the Central Bank.<o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">As Demetriades discovered, there are ways to limit
the practical independence of the Governor such as appointing (or firing)
Deputy Governor(s), creating new Executive Directors with a seat on the Board
whose roles are determined by the Board rather than the Governor, and requiring
Board approval for bank licensing and amendments to existing licenses. These might
look like arcane corporate governance issues, but they do matter, especially
when independence is most needed, i.e. in times of financial crisis.
Interestingly, the European Central Bank (ECB) and the Commission witnessed
these changes but had limited powers to intervene other than expressing concerns
through legal opinions. <o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">Demetriades also plays a detective role and explains
how the crisis in Cyprus came about. It is interesting that the origin of the
crisis is traced back to the country’s business model – an offshore financial
centre for wealthy Russians and Eastern Europeans, supported by a network of
lawyers and introducers to banks. Like many of you, I have seen the term business
model applied to companies, but this is first time I have seen it applied to
describe a country. This suggests to me that avoiding the crisis would have
required a very tough regulatory stance, and that it would have happened sooner
or later, regardless of the Euro crisis.<o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">The book identifies the trigger event for the crisis.<span style="mso-spacerun: yes;"> </span>Interestingly for me, someone who works in
risk management, the trigger is the decisions of Cyprus’ two main banks to
invest most of their equity capital in Greek debt in the spring 2010, when
Greece was being downgraded. This resulted in losses in excess of €4 billion. <span style="mso-spacerun: yes;"> </span>As Demetriades notes, this decision ignored
the fundamental relationship between yields and risk, and diversification of
investments.<o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">There were also challenges for international
institutions in the troika. There are a number of references to the IMF
analysis of debt sustainability and the assumptions underpinning it. A debt to
GDP ratio of 100% was assumed to be sustainable for Cyprus, compared to 120%
for Greece. In Demetriades’ view, this made the bail-in for Cyprus larger than might
have been necessary.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">Demetriades’ tenure as a Governor of the Central
Bank spanned a right-wing and a left-wing government. You might have
preconceptions about which government would find the notion of an independent
Central Bank more challenging. In fact, both governments found it equally
challenging because of national pride and voting considerations. These
challenges weigh heavily on Demetriades who concludes the book with a stark
warning about the future of the Euro, which is in fact relevant to all the
members of the Eurosystem: ‘[P]opulism, if left unchecked, can shake the
foundations of the monetary union beyond the point of repair’.<o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">While the book is entitled ‘a diary’, don’t let
that word put you off. It is much more than a personal diary. <o:p></o:p></span></div>
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<span style="color: black; font-family: Arial, Helvetica, sans-serif;">Just as I did when reading <i>Chronicle of a Death
Foretold</i>, I wondered if Demetriades could have done something to maintain
the independence of the Central Bank and avoid the clash that led to his resignation.
I could not identify anything.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: #fefdfa; color: #333333; font-style: italic; font-weight: 700;">If you found this post of interest, you may want to subscribe and receive further posts by email – see box on the right hand side of the screen or click </span><a href="http://crescendo-erm.blogspot.co.uk/" style="background-color: #fefdfa; color: #7d171d; font-style: italic; font-weight: 700;">here</a><span style="background-color: #fefdfa; color: #333333; font-style: italic; font-weight: 700;">. </span></span></div>
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<br />Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0tag:blogger.com,1999:blog-1785799504249611230.post-31998689781555943422018-04-04T10:43:00.002+01:002018-04-04T10:43:55.720+01:00Conflicts of Interest: Connecting Enforcement and Supervision<br />
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<span style="font-size: 12pt;">The FCA announced enforcement action against a
commercial broker and a fine of £4 million in late 2017 as a result of failures
associated with the broker’s management of conflicts of interest. The details
of the case are </span><a href="https://www.fca.org.uk/publication/final-notices/bluefin-insurance-services-limited-2017.pdf"><span style="font-size: 12.0pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">here</span></a><span style="font-size: 12pt;">.</span></div>
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<span style="color: black; font-size: 12.0pt;">Conflicts of interest can be anywhere, and firms
are well aware of that. However, there is a qualitative difference between the
conflict of interest that an individual might have with, say, a supplier, and
what the FCA identifies as an ‘inherent conflict of interest’ in the business
model or ownership structure. This is the risk that commercial intermediaries must
manage.<a href="file:///C:/Users/Admin/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/Conflicts%20of%20interest%20v03.docx#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: black; font-family: "calibri" , "sans-serif"; font-size: 12.0pt; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></a> It is not static, and it
changes as intermediaries take up other activities where they act as an agent
of the insurer.<o:p></o:p></span></div>
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<br /></div>
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<span style="color: black; font-size: 12.0pt;">The FCA has also undertaken a thematic review of
commercial insurance intermediaries focusing on this issue. (It published the
results in 2014 </span><a href="https://www.fca.org.uk/publication/thematic-reviews/tr14-09.pdf"><span style="font-size: 12.0pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">here</span></a><span class="MsoHyperlink"><span style="font-size: 12.0pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">.</span></span><span style="color: black; font-size: 12.0pt;">) The FCA evidence
included a survey of small and medium enterprises (SMEs).<a href="file:///C:/Users/Admin/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/Conflicts%20of%20interest%20v03.docx#_ftn2" name="_ftnref2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: black; font-family: "calibri" , "sans-serif"; font-size: 12.0pt; line-height: 115%;">[2]</span></span><!--[endif]--></span></span></a> This suggests that many
SME customers do not fully understand the intermediary’s role and how it may have
changed in recent years. For example, four of five SME customers expect an
intermediary to get quotes from two insurers, which is not consistent with how
intermediaries operate, in particular for micro SME customers (fewer than nine
employees).<o:p></o:p></span></div>
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<span style="color: black; font-size: 12.0pt;">There are wider messages from this enforcement
action for the practical management of inherent conflicts of interest. To begin
with, there should be a regular process to identify conflicts of interest.<span style="mso-spacerun: yes;"> </span>This might be challenging but following the
sources of revenue would enable a robust identification of conflicts and of the
impact of changes in the business model.<o:p></o:p></span></div>
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<span style="color: black; font-size: 12.0pt;"><br /></span></div>
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<span style="color: black; font-size: 12.0pt;">While a policy on conflict of interest is a regulatory
requirement, it needs to be comprehensive enough to enable staff in the
business to actually manage conflicts of interest. This would require specific
guidance articulating how to deal with customers, including what information to
collect, what checks to undertake, and the production of meaningful management
information.<o:p></o:p></span></div>
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<span style="color: black; font-size: 12.0pt;">Business arrangements such as ‘preferred
facilities’ are not ruled out but must be managed and monitored carefully,
taking into account links to brokers’ remuneration, how the firm presents
itself to SMEs, the existence of ‘Chinese walls’ and customers’ (probably
limited) understanding of the intermediary’s role.<o:p></o:p></span></div>
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<span style="color: black; font-size: 12.0pt;"><br /></span></div>
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<span style="color: black; font-size: 12.0pt;">Any quality reviews by the first line should be
designed with a view to oversee how inherent conflicts of interest have been identified,
managed and mitigated. The process should be risk based, i.e. always applying
the same degree of checks to all brokers is unlikely to be appropriate.<o:p></o:p></span></div>
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<span style="color: black; font-size: 12.0pt;">Last but not least, as ever, culture is a factor.
If statements from senior management do not recognise and support the need to
manage inherent conflicts of interests, don’t expect much of the above to be in
place.<o:p></o:p></span></div>
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The FCA will usually say something about how the case was discovered, by either
supervisory activity or internal review. I was puzzled that the FCA was rather
vague on this occasion. On reflection, I suspect (but cannot be certain) that
there may be a dependency with the FCA’s thematic review on conflicts of
interest mentioned earlier. If that’s the case, it is useful for firms to
understand the potential consequences of being unprepared for a thematic review
when invited to participate.<o:p></o:p></span></div>
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<span style="font-size: xx-small;"><a href="file:///C:/Users/Admin/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/Conflicts%20of%20interest%20v03.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "calibri" , sans-serif; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></a><span style="color: black;"> This risk is not
exclusive to commercial intermediaries. It exists in other parts of financial
services and has also been covered in other FCA enforcement activities.<o:p></o:p></span></span></div>
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<span style="font-size: xx-small;"><a href="file:///C:/Users/Admin/Google%20Drive/Cloud/Crescendo%20Advisors/Blog/WIP/Conflicts%20of%20interest%20v03.docx#_ftnref2" name="_ftn2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "calibri" , sans-serif; line-height: 115%;">[2]</span></span><!--[endif]--></span></span></a> <span style="color: black;">Businesses with fewer
than 250 employees.</span></span></div>
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Crescendo ERMhttp://www.blogger.com/profile/16808277483641120775noreply@blogger.com0