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By Gary Lynam, Managing Director EMEA, Protecht
Protecht’s survey of UK financial-services institutions offers important insights into 2024’s risk and resilience outlook. The survey highlights the strategic adaptations and investments banks are making to navigate a rapidly changing financial landscape, with the backdrop of regulatory evolution and increasing reliance on technology.
These were the key survey findings:
Geopolitical uncertainty and liquidity challenges: Banks are navigating a landscape marked by significant geopolitical tensions and liquidity constraints.
Operational resilience as a priority: Operational resilience emerges as a crucial focus area, with banks allocating significant resources towards integrating resilience into their enterprise risk management (ERM) frameworks.
Technology and digitisation efforts: The survey reveals a strategic shift towards automation and efficiency in risk-management processes, with a cautious yet optimistic outlook on the adoption of generative AI (GenAI).
Third-party risk management (TPRM): With regulatory pressures and changing risk profiles, banks are significantly increasing their investments in TPRM solutions.
Regulatory landscape and compliance: The evolving regulatory environment demands a more integrated and comprehensive approach to risk management, focusing on customer outcomes and third-party risk management.
The findings underscore the pressing need for banks to bolster their risk-management frameworks, integrate operational resilience and leverage technological advancements for enhanced efficiency and compliance.
About the survey
The Protecht and Censuswide survey, conducted among 400 UK financial institutions during July and August 2023, sought to uncover these institutions’ foci for the uncertainties of 2024 and beyond and understand how financial organisations are gearing up to navigate the complexities of geopolitical risks, liquidity challenges, technological advancements and regulatory pressures.
The invitation-only online survey captured insights from a broad spectrum of the industry, including asset-management companies, brokerage firms, central banks, challenger banks, digital banks, fintech (financial technology) organisations, insurance companies, investment banks and retail and commercial banks—providing strategic insights into risk and resilience.
Geopolitical uncertainty and liquidity challenges
Banks in 2024 face unprecedented challenges stemming from geopolitical uncertainties and liquidity constraints. Geopolitical risks, such as international conflicts, trade disputes and political instability, significantly impact banking operations and strategic decision-making. This translates into heightened risk-management demands, requiring agile strategies to navigate an unpredictable geopolitical climate.
The Protecht survey identified geopolitical uncertainty (26 percent) and liquidity/access to capital (24 percent) as the top two critical risks faced by UK financial organisations in 2023, projecting into 2024. Geopolitical risks, underscored by events such as Russia’s invasion of Ukraine and strained US-China relations, have cast a shadow of unpredictability, making it challenging for banks to forecast and act.
Compounded by global inflation, which has led to significant interest-rate hikes over the past 18 months, liquidity and access to capital have emerged as pressing challenges. The resultant higher interest rates have dried up liquidity and restricted access to capital, contributing to a slowdown in business sentiment. Many organisations are concerned about securing the necessary funds for growth in 2024, especially in light of notable financial institutions’ failures, such as Credit Suisse, Silicon Valley Bank (SVB) and Signature Bank, in 2023.
Operational resilience as a priority
Operational resilience is a major priority for banks, as the survey findings underscore. With the financial landscape continually evolving, driven by technological advancements and regulatory pressures, banks are now more than ever focused on bolstering their operational resilience.
A significant majority, 59 percent of respondents, have earmarked substantial budgets towards integrating operational resilience into their enterprise risk management (ERM) frameworks. This investment is not just a response to regulatory mandates but a strategic move to safeguard against disruptions, ensuring the continuity of critical banking functions in the face of unforeseen events.
Technology plays a pivotal role in enhancing operational resilience. The survey indicates that 61 percent of financial institutions plan to increase their investments in tools and technology to support resilience activities. This technological infusion aims to automate risk-management processes, improve incident-response capabilities and ensure seamless operations amidst challenges.
Technology and digitisation efforts
The survey uncovers a shift towards investment in technology and tools for risk management, highlighting a collective move towards automation and efficiency within the financial sector.
With 63.5 percent of respondents indicating plans to boost their investments in digitisation and the automation of risk activities, the focus is clearly on leveraging technology to enhance risk-management processes. This strategic shift aims to reduce reliance on manual processes, which have been predominant across core areas of enterprise risk management frameworks, such as control evaluation, monitoring and incident management.
However, the survey also reveals a cautious approach towards adopting generative AI within banking operations. Despite the potential of generative AI to revolutionise aspects of financial services, concerns around regulatory implications and data privacy have tempered the enthusiasm for rapid expansion. Only 35 percent of UK financial organisations currently utilise generative AI, with limited or no plans for broader implementation in the near term.
Third-party risk management (TPRM)
The Protecht survey highlights a growing emphasis on and investment in third-party risk management (TPRM) among financial organisations, driven by heightened regulatory scrutiny and recognition of evolving risk profiles.
Sixty-eight percent of the UK financial organisations surveyed plan to significantly increase their investments in TPRM solutions within their ERM programmes over the next 12 months. This surge in focus and funding is a response to regulatory demands and an acknowledgment of the dynamic nature of third-party risk profiles, underscoring the critical need for a more integrated and automated approach to TPRM.
However, integrating TPRM into broader ERM strategies presents both challenges and opportunities. The survey indicates that many TPRM processes remain manual, pointing towards the necessity for technological enhancement and automation to ensure more robust risk-management practices. The move towards automation in TPRM is not just about enhancing efficiency; it’s about ensuring that third-party engagements are resilient, compliant and aligned with the organisation’s risk appetite.
Regulatory landscape and compliance
The Protecht survey underscores the pivotal evolution in the regulatory landscape, with a heightened focus on customer outcomes and the intricacies of managing third-party risks.
This evolving scenario presents challenges and opportunities for banks as they seek to achieve compliance and strategic planning. Regulatory bodies are emphasising the importance of operational resilience and management of third-party relationships, recognising these areas as crucial for maintaining financial stability and protecting consumer interests. Compliance now demands a more integrated approach, obliging banks to weave third-party risk management seamlessly into their broader enterprise risk management strategies.
The slow adoption of AI is another area in which the regulatory landscape is an important factor. The relationship between AI and compliance within the financial sector is characterised by the careful navigation of emerging technologies against a backdrop of evolving regulatory landscapes. Financial institutions are keen to harness AI’s benefits but equally committed to managing its risks and ensuring that their adoptions of AI technologies adhere to the highest standards of regulatory compliance and ethical practices.
Case study: Metro Bank’s perspective
In light of the Protecht survey’s insights, Tim Ashton, head of enterprise and operational risk at Metro Bank, provided valuable perspectives that resonate deeply with Metro Bank’s risk-management strategies.
Metro Bank has recognised geopolitical risk as a key concern, placing it on its emerging-risk register. This aligns with the survey’s identification of geopolitical uncertainty as a critical risk area, highlighting the importance of agility and strategic foresight in banking operations.
“Geopolitical risk is certainly a key emerging risk presenting many uncertainties and is on Metro Bank’s emerging risk register, as is AI, for which we are starting to explore the benefits as well as the risks,” Ashton explained.
Metro Bank’s emphasis on enhancing its operational resilience also aligns with the survey’s findings, where significant budget allocations towards operational-resilience capabilities are observed across the sector.
“Metro Bank is continuing to enhance its robust approach to meeting operational resilience requirements and monitoring the risks related to our third parties, for which it is important to have a ‘joined up’ approach,” Ashton added.
Strategic implications for banks
The survey’s findings elucidate significant strategic implications for banks, particularly in the realms of risk management, operational resilience and technological investment. These insights offer a roadmap for banks to navigate the complexities of the current financial landscape, enhancing their competitive advantages while adhering to regulatory compliance.
Risk-management strategies must now prioritise geopolitical awareness and liquidity planning, reflecting the survey’s identification of these areas as top concerns. Banks can leverage this insight by developing more sophisticated risk-assessment tools and scenario-planning capabilities, allowing for more agile responses to global uncertainties.
Operational resilience has emerged as a non-negotiable priority, with the survey highlighting substantial investments in this area. Banks should view these investments not just as compliance necessities but as strategic assets that can protect and potentially enhance value in times of crisis. By integrating operational resilience with enterprise risk-management frameworks, banks can ensure more cohesive and effective responses to disruptions, thereby safeguarding critical functions and maintaining customer trust.
Technological investments in automating risk-management processes and cautiously implementing generative AI comprise a dual opportunity for efficiency gains and innovative leadership. Banks can leverage these technologies to streamline operations, enhance decision-making and develop new customer offerings, all while maintaining vigilant approaches to managing the associated risks.
By strategically addressing these areas, banks can fortify their operations against emerging threats, capitalise on new opportunities and position themselves favourably in a competitive and regulatorily complex environment.
