Did you know financial institutions without a risk management policy are more likely to suffer from increased employee turnover, loss of profits, and a damaged reputation?
What is a risk management policy?
A risk management policy is an important guiding document that includes the practices and procedures financial organizations need to institute to manage and mitigate risk effectively. It outlines all the material risks your company is likely to face, as well as the approach to managing those risks.
We'll show you some of the key mistakes you should avoid when writing a risk management policy for your unique organization.
5 Mistakes to Avoid When Writing a Risk Management Policy
Risk management policy describes and communicates your firm’s requirements for managing and overseeing risk. To write an effective policy, (1) identify and understand material risks because we're writing the policy to address specific risks, (2) formulate risk appetite because we're writing the policy to establish parameters in which the business should operate based on the organization's risk appetite, (3) understand the laws and regulations applicable to the risk, (4) understand the long term goals and values (i.e., strategic guiding principles) and (5) understand the tactical operating principles that support the long term goals and values.
So, what things should you avoid when writing a risk management policy for your business or organizations?
Mistake #1: Writing a Policy Like a Procedure
A good risk management policy should read like a formal statement of your firm’s strategy and position. The difference between a policy and a procedure is that a procedure isn’t just a statement, it outlines instructions for how and when your policy should be implemented.
When drafting your policy, you need to specify:
- What the purpose of the policy is
- Who the policy applies to
- When the policy is applicable
- What material inherent risks are involved
- What actions are required
- What restrictions there are
- What parameters the business should operate within
- What your fundamental strategic guiding principles are
- What your operating principles are
- What laws and regulations you need to comply with and how you’ll ensure compliance
Mistake #2: Laws & Regulations Aren’t Linked to the Policy
Laws and regulations you need to follow should always be clearly linked to your policy. You need to know exactly where in your policy you’ve addressed regulatory requirements and make sure to connect it to your governance documents.
Failure to do so could land you in some hot water with regulators. They take this part of your policy very seriously, and they want to see the linkage.
Mistake #3: Expectations for Roles & Responsibilities Aren't Clearly Set
When writing your policy, don’t forget to include information about who is responsible for doing what when it comes to implementing the policy.
You need to set clear expectations regarding roles and responsibilities, so everyone involved knows exactly what to do. You need to set clear expectations regarding roles and responsibilities, so everyone knows their role in carrying out the policy requirements.
Mistake #4: Expectations Regarding Policy Exceptions or Escalations Aren't Always Clear
Another pitfall most financial organizations make when writing their risk management policies is to forget to include expectations regarding policy exceptions or instructions for escalations.
Are exceptions to the policy allowed?" So it'll read, "Are exceptions to the policy allowed? If there is an exception or a breach, what is the escalation path? And what is the expected outcome of the escalation? And if there is a violation of the policy, what are the consequences?
Policies are not always clear about what to do in these situations, and it is vital that you clearly define what is expected of personnel. When your policy is too vague, you're not setting the right tone at the top, and action is left to the discretion and interpretation of your staff.
Mistake #5: Policies Aren't Updated Often Enough
Risk management policies should be reviewed and updated at least once a year or when there is a significant change in the firm's activities or operating environment. Not updating your policy leaves your organization open to potential risks, and there could be confusion about what to do should the policy need enforcing or escalating.
If significant internal or external events have occurred that changes the firm's risk profile and the policy is outdated, it won't provide clear guidance regarding expectations.
Create a Risk Management Policy With Compliance Core
Writing a risk management policy on your own is never a good idea. Even if you're a risk management expert, you’re too close to your business's inner workings to clearly see all the potential risks associated with your workflows and processes" with "products, services, processes, systems, and other activities.
You need someone with risk management experience who can give you an outsider’s assessment of the risks surrounding your company, but be careful to hire the right consultant for the job.
You want to hire someone who has your company's best interests at heart. Otherwise, you could still end up suffering from catastrophic losses or theft. We understand just how important a decision this is, and we know what kind of information you need to choose the right consultant.
To kickstart your risk management and compliance program, we recommend taking our self-assessment quiz. Use these findings to identify gaps and take your organization's risk management and compliance posture to the next level. After the quiz, you'll be given an opportunity to schedule a free consultation to discuss results.