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Investment firms sharpen risk management as Brexit looms

Investment firms sharpen risk management

As the reality of Brexit strikes, KPMG’s annual Risk and ICAAP benchmarking survey, Counting the Cost, finds asset managers have started to get more realistic when it comes to risk management.

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Also on home.kpmg

• Capital assessments are getting better

• Operational risk management takes top spot on the regulator’s agenda

• Forty percent of firms have, or have plans to, relocate as a result of Brexit

As the reality of Brexit strikes, KPMG’s annual Risk and ICAAP benchmarking survey, Counting the Cost, finds asset managers have started to get more realistic when it comes to risk management.  

Through 2018 the median capital increase imposed by the FCA was 39%, down from 82% in 2017. However, whilst most firms are using models to get a more accurate sense of their capital requirements, a fifth of those who got it wrong, got it very wrong with the FCA asking them to more than double their capital. In addition, over half (56%) of firms visited by the FCA were made to implement a formal risk mitigation programme.

Operational risk modelling has overtaken governance as the number one concern in feedback from prudential regulatory visits. Capital assessments have improved due to the use of models and the regulator knows the same can happen with operational risk. But, there is a worrying misalignment between firms’ risk management frameworks and their stated risk appetite suggesting that this still isn’t being discussed in the boardroom.  

Looking at Brexit, in 2017 44% of firms had stress tested their business against Brexit. In 2018, every firm had conducted macroeconomic stress tests. This year, 40% percent of our respondents told us they have, or plan to, implement Brexit relocation plans.  

David Yim, Partner and author of the report, says:  “It’s encouraging to see that firms have introduced models to more appropriately estimate their capital positions, they’re stress testing their businesses and they’re creating more realistic wind down plans. However, despite the progress, there are worrying indicators that operational risk still isn’t a boardroom issue. Perhaps even more worryingly, the regulator routinely found that many firms don’t understand the risk management models they are using. 

“The disparity between firms’ stated risk appetites and risk frameworks may sound like a back office issue, but it really isn’t. It means firms are either routinely taking more risk than they are comfortable with, or they will be suffering significant opportunity costs. In the current environment where growth is the Holy Grail, firms can’t afford any additional costs – financial or otherwise.” 

Jon Holt, Head of Financial Services at KPMG adds: “The asset management sector is responding to the fact that risk awareness and management has to be more than a tick-box exercise. However there is a way to go in a number of areas, for example, 17% of firms do not have a liquidity management framework even though it has long been a regulatory requirement.” 

 

ENDS

 

For media enquiries, please contact:

Christina Bridge, KPMG Corporate Communications

T: 07789504905

E: Christina.Bridge@KPMG.co.uk 

About KPMG in the UK:

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 14,500 partners and staff.

The UK firm recorded a revenue of £2.2 billion in the year ended 30 September 2017. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and territories and has 200,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

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