How to Choose the Best Financial Services Risk Management Framework

Enterprise risk management can get extremely complex, especially when you are dealing with a frequently-targeted industry such as the financial sector. In fact, financial institutions and companies specializing in financial services are amongst the most targeted businesses, resulting in a multifaceted and complex risk management landscape. Enter the financial services risk management framework, a tool that can help guide an organization’s efforts to eliminate vulnerabilities, neutralize threats and minimize risk factors. But what is a risk management framework? And how do you choose the best one for your organization’s needs? 

What is a Financial Services Risk Management Framework? 

A financial services risk management framework is a sort of template or guide that is used by a company to identify, assess, and combat risks that are confronting the organization and its interests. The concept of a risk management framework can be traced back to NIST — the National Institute of Standards and Technology — which originally developed the risk management framework to provide protection to the U.S. government’s technology and IT infrastructure. Today, commercial organizations such as banks and credit unions leverage this template to reduce risks and vulnerabilities. 

How Do You Choose a Financial Services Risk Management Framework? 

There’s no such thing as a one-size-fits-all financial services risk management framework. Each organization’s needs differ somewhat and as a result, the best framework will vary. All frameworks do share some commonalities, such as the five components of a risk management framework for the financial space. They are as follows. 

Vulnerability and Threat Identification for Financial Services Risk Management

The first component of a risk management framework involves the identification of risk factors, vulnerabilities, and threats. Once identified, you perform a comprehensive risk assessment to determine which issues pose the greatest threat to the company. This evaluation process allows you to assign a priority level for each issue so you can decide which matters will be tackled first. Notably, threat and vulnerability identification and assessment should be an ongoing, continual process. New threats, risk factors, and vulnerabilities will arise over time, while the dynamics of an existing issue can evolve. Therefore, your risk management task force must continually identify issues and perform periodic evaluations.

Assessment and Dynamics for Financial Services Risk Management

Once the vulnerabilities, risk factors, and threats are identified, your risk management task force will need to perform a comprehensive assessment to identify the root cause of a threat and the dynamics that have allowed that issue to emerge in the first place. This understanding is necessary if you are going to be effective in your mitigation efforts. The task force should also attempt to determine the potential impact of a threat or risk since this will affect how aggressively the organization seeks to neutralize a threat or mitigate a risk factor. 

It’s important to remember that some risks may be impossible to eliminate entirely. In fact, some level of risk or vulnerability may be inherent to your business strategy, resulting in some risks being considered “acceptable.”

Risk Mitigation for Financial Services Risk Management

Risk mitigation efforts can begin once a company has identified, evaluated, and assessed the threats and risks that comprise the organization’s risk management landscape. Your risk management task force will be charged with developing a risk management and mitigation strategy, which can include everything from new policies and procedures to new controls or taking out an insurance policy to cover downtime losses. Additionally, a company should establish data collection capabilities, allowing for more effective monitoring, which also happens to be the fourth component of the risk management framework.

Risk Monitoring for Financial Services Risk Management 

Once you’ve implemented risk mitigation measures, it’s time to begin collecting data which can then be analyzed to determine overall efficacy. Monitoring is essential for maintaining a consistent level of minimized vulnerability and low risk. Data-driven decision-making allows an organization’s leaders to make decisions that are likely to bring about a positive outcome. As you can imagine, this is especially important when it comes to the numerous and highly impactful threats that a financial services provider confronts on a regular basis. This data can also be compiled into reports which are useful for updating stakeholders and business leaders. 

Risk Governance for Financial Services Risk Management

Risk governance refers to the practice of overseeing risk mitigation efforts and taking action to ensure that all policies, procedures, practices, and processes align with the financial service company’s risk mitigation strategy. In other words, governance involves an evaluation of the company’s workings to verify that everything is in alignment. Without this, you could find yourself in a situation where practices are compromising or even directly conflict with the company’s risk mitigation efforts. 

These five components are common to virtually all risk management frameworks. The financial services framework places much greater emphasis on governance because many of these risks and vulnerabilities are rooted in the organization’s operations and procedures. 

What Are the Five Steps of a Financial Services Risk Management Framework? 

NIST’s risk management framework is comprised of several basic steps and this is true for frameworks that are used by financial services providers too. These steps are as follows. 

Preparation

The company’s risk management task force must establish policies and implement measures that will prepare the organization’s employees to adopt a newly-deployed risk mitigation strategy. The preparation process may involve employee training and the creation of new roles or positions that are required for a successful risk mitigation plan rollout. 

Categorization

In this phase, the identified risks and vulnerabilities are categorized and prioritized. Considerations include the nature of the threat, the potential consequences or impact of that threat, and the measures that are required to neutralize a threat or mitigate risk. 

Selection

The selection phase involves a review of the potential solutions, ranging from a monitoring system and threat detection software to more aggressive measures such as hiring a cybersecurity consultant to oversee the financial service provider’s IT systems. The risk management task force will choose the controls and measures that are likely to be the most effective in neutralizing threats and minimizing risks. 

Authorization

In some cases, company leaders and other key stakeholders must provide approval and authorization before you deploy new risk management solutions. This is especially true in the financial sector, where you have lots of legal and regulatory oversight to consider. You don’t want to find yourself in a situation where you’ve implemented risk mitigation measures that lead to non-compliance and fines. 

Implementation and Deployment

Once a risk mitigation plan has been developed, it’s time to implement and deploy those solutions. The software is configured and launched. New policies are written and distributed. Employees receive training for newly implemented IT systems. The goal is to deploy measures that will effectively mitigate risks, eliminate vulnerabilities and neutralize threats. 

Assessment

Assessments must be performed after the newly deployed risk mitigation measures have been put into place. The assessment process allows you to evaluate the overall efficacy of those measures. If necessary, the risk management task force can take additional action to achieve the desired result. 

Monitoring

Continual monitoring is an essential part of the risk management process. The risk management landscape is extremely dynamic, especially in the financial space where you have cybercriminals and other bad actors continually discovering new forms of vulnerability and developing new tactics to exploit those vulnerabilities. Monitoring allows you to rapidly identify new problem areas in addition to identifying areas where previously effective measures are no longer effective. 

The best financial services risk management framework will have all of these steps and components. Collectively, these elements will guide your financial services company’s risk mitigation efforts toward success. 

Risk management is a dynamic discipline, especially in the financial services field. However, the right technology can make a company’s risk mitigation efforts far more effective. Risk management software is one of our specialties here at iTech where we have extensive experience developing innovative enterprise risk management software systems. Our purpose-built software platforms are developed following intensive collaboration with the client. Once we understand a financial service provider’s challenges, strategic objectives, and strengths, iTech’s development team will create an innovative Digital Transformation solution. Contact the iTech team today and let’s begin a dialogue on your company’s risk management challenges and strategies for the future.