In retail banking, scenario development commonly featured conduct risk. In Asia Pacific, fraud has also been a significant concern among FIs.
Conduct risk, including mis-selling of services and improper business practices, is the most significant risk financial organisations are preparing for in their scenario analysis, according to a new report from ORX.
ORX, an association of operational risk professionals, works with more than 50 banks and insurers from around the world to support their scenario development. The new report is the result of analysis of ORX’s 2020 scenario library to identify trends.
In 2020, employee conduct was the top focus for scenario analysis at financial institutions, with over 90 percent developing scenarios specifically to mitigate against this risk. External fraud, technology failures, and physical security and safety have also been high on banks’ and insurers’ agendas for scenario planning.
“For eight years now, we have collected a library of top operational risk scenarios from the financial institutions we work with, and employee conduct is a subject that comes up every year,” said Steve Bishop, Head of Risk Information at ORX. “With the recent pandemic outbreak, this trend is likely to continue.”
According to Bishop, ORX members are concerned that adverse economic conditions will likely lead to increased scrutiny from regulators in the area of conduct risk. Specifically, uncertainty around practices and contractual obligations related to government-backed pandemic relief initiatives – such as mortgages holidays and emergency commercial loans – could lead to further conduct issues within the industry, he said.
Within retail banking, scenarios commonly featured conduct risk, particularly mis-selling and improper business practice, driven mainly by potential failures in detecting malpractice in selling practices and the high number of customers involved.
Meanwhile, firms with a global presence operating in trading and sales identified rogue trading and processing errors as the most severe events they are planning for. For both of these risks, market volatility was said to be the key driver that could exacerbate potential losses.
Fraud is a significant concern among financial institutions in Asia-Pacific, where scenarios often refer to cyber-related frauds with external parties hacking IT systems to steal credentials.
A summary report of ORX’s findings is available here.