Enhancing Operational Resilience - The Cornerstone of Risk Management for Smaller FS Firms

In the ever-evolving landscape of the financial services sector, operational resilience has fast become a crucial imperative for sustaining business success and risk management. The Prudential Regulatory Authority and the Financial Conduct Authority both see it as a high supervisory subject for 2024 and onwards.

As we navigate through 2024, it will be the smaller financial services firms that find themselves facing the toughest challenges. Big Firms can recover, both reputationally and financially, whereas smaller Firms with limited capital and people resources, may never recover.

In 2025, Firms of a certain size (Solvency II Firms) will have to be able to demonstrate that their Operational Resilience responses are defined and embedded throughout the Firm. Regulators will be checking – so non-compliance is not an option!

From technological advancements such as AI, to regulatory rule changes, to the growth in cybercrime and unforeseen global events, the need for operational resilience has never been more critical. Here at Mutual Governance we have implemented several operational resilience reviews and below we have highlighted some of the key recurring themes -?

Navigating Technological Advancements:

The rapid pace of technological innovation is transforming the financial services industry at an ever-increasing pace, presenting both opportunities and challenges for SME Financials.

Fintech disruptions, digital transformation, AI innovations, and the increasing reliance on complex systems have heightened the risk of operational failures and risks. Defending against cyber-criminal attacks is high priority. For smaller Firms, embracing these technological advancements is essential to compete in modern markets, but it comes with the responsibility of ensuring robust operational frameworks that can withstand potential disruptions.

Every small firm should develop an oversight strategy to plan how to react to a wide range of scenarios. Such a strategy should be Board approved.

Adapting to Regulatory Changes:

Regulatory landscapes are in a constant state of flux, with both the PRA and FCA continually updating and tightening regulations to enhance financial stability and protect consumers. In the UK, the financial sector has witnessed significant regulatory changes, including the implementation of new Operational Resilience, Disaster Recovery and Cyber Security regulations over the last few years. FS Firms must be agile in adapting to these changes, not just to meet compliance requirements but to continually enhance and monitor their operational foundations against emerging risks.

Coping with Global Uncertainties:

The globalized nature of today's economy exposes every consumer and business to geopolitical uncertainties, economic fluctuations, and unforeseen events. The COVID-19 pandemic, cost of living impacts and wars in both the middle east and Ukraine in particular, have underscored the importance of operational resilience as firms were forced to adapt rapidly to remote work setups, changing customer behaviours, and market volatility. The ability to withstand and recover from such shocks is integral to the long-term sustainability of financial services firms from sales revenue, investment return and solvency perspectives.

Good operational resilience planning will help you to be “battle ready” when a such threats suddenly appear.

Protecting Customer Trust:

Operational failures can have severe consequences on customer trust, loyalty and reputation. In an industry where trust, brand and reputation are the cornerstones of client relationships, Firms (especially smaller ones) cannot afford to compromise on operational resilience. It truly is ‘business critical’, and not something that can be taken lightly in these turbulent times. ?Whether it's ensuring data security, maintaining uninterrupted service delivery, promptly addressing customer concerns, operational resilience directly influences the reputation and credibility of financial services Firms.

Building a Robust Risk Management Culture:

Operational resilience is not just about mitigating risks but also about fostering a culture of proactive risk management. There is a need to instil resilience at every level of the operation, through governance, employee training and robust risk management processes. A culture that values preparedness, mitigates external and internal risks, along with a drive for continuous improvement, can act as a shield against unforeseen challenges.

Conclusion:

Embracing operational resilience is not merely a regulatory obligation but a strategic imperative that will determine the survival and growth of Firms in the dynamic financial services landscape.

If you need cost-effective support or guidance on any of the above issues please do contact us for a more in-depth chat.

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