Growing Importance of Compliance and Frm

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International Compliance Association - ICA

Paper Prepared by: Ilona Pilipenko – ICA Compliance – ICT Training

Table of Contents:

1. Question No. 1 ……………………………………………………. ……..3-6 2. Question No. 2…………………………………………………………...7-27 3. References………………………………………………………………28-28 4. Bibliography…………………………………………………………....29-29

Question No 1:
Explain, as if to a new member of the compliance staff of an organization who has no previous knowledge or experience of risk management practices, what the above diagram represents, what its purpose and why is it to a relevance to a regulated organization.

Risk reporting and management information is a continuous process which, to be thriving, has to be aligned with organizations’ strategic objectives. Its growing importance is substantial in any organization willing to succeed, adjust and adapt to an ever changing business environment. The economic collapse of 2008 was in large part caused by inadequate risk management by financial institutions and inability to sufficiently identify and mitigate those risks at the right time. The purpose of this short report is to assess the sample risk reporting and management diagram and define in a concise manner the main stages of risk management structure, and explain why it is of relevance to a regulated organization. To begin with, let’s define risk. In the business sense the Oxford dictionary defines risk as the negative occurrence that is caused by internal or external vulnerabilities. It is the probability of the variation from the unknown. Risk management is therefore a process concerned with forecasting and evaluating financial risks together and the identifying necessary procedures to avoid or minimize their impact. The top of the diagram - organizations strategic objectives, is the most important stage of the whole diagram. Risks have to be managed according to their priorities within an organizational chart. Firm’s priorities should be directly linked to the firm’s strategic objectives. For instance, if a fund administrating company ABC Ltd.’s main objective is concerned with the highest standards of compliance, management Board should align all departments’ resources to practically achieve that objective by putting systems and controls in place. Structure and administration of risk management is concerned with initiating risk management as an integral and ongoing part of its management processes within each department and effective mechanisms that are put in place to carry that function (Brand, Andrew, Krebsz Marcus, “Risk in Financial Services”, 2010). Each department should have clearly defined risk management structures and responsibilities. E. g. the IT department within a fund administration company ABC Ltd develops its own specialized portfolio management system which supports all aspects of fund administration and methodically monitors its compliance procedures. Risk assessment process comprises of 5 clearly defined steps which support better decision making by contributing a greater insight into risks and their impacts. Risks are analyzed, identified, described, estimated, and evaluated in order of their impact (severity) and probability (Brand, Andrew, Krebsz Marcus, “Risk in Financial Services”, 2010). For ABC Ltd these steps often include production of groups, charts, diagrams and risk assessment processes to group, rank and understand risks that are being faced by each fund, calculation of NAV and various fund portfolios’ evaluation techniques. Risk treatment and post implementation review is concerned with mitigating and reducing the impact of risks and improving management controls in place. Person in charge of risks identified (Head if Risks) and his/her role is to ensure that risk governance is applied. For ABC Ltd this includes activities such as formulating a risk philosophy, defining organizational risk appetite and building risk improvement and assurance processes. Monitoring is the...
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