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The RiskBusiness Regulator Survey Shows Some Cause for Concern

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In July and August 2011, RiskBusiness International undertook an electronic survey amongst risk management professionals working in the global financial services industry to rate their regulator, anonymously, on its performance in several categories relating to operational risk supervision and oversight: Clarity and completeness of regulations; conformance of regulations to Basel II and Solvency II; approachability; detailed knowledge of operational risk management; consistency; level of guidance provided; fairness; degree of home-host regulator interaction; industry discussion and consultation; and staff turnover.

The aim of this Survey was to benchmark market participants’ perspectives on the effectiveness and appropriateness of operational risk regulation.

The results were analysed overall, by geographical region and by regulator. Individual regulator results are only available to the relevant regulator.

The results overall, in this time of ongoing global financial and economic uncertainty, are of deep concern for the entire industry:

  • The majority of respondents believe that operational risk-related regulations are still not clear;
  • Regulators are not that approachable, do not volunteer guidance and do not provide leadership in industry debate on operational risk;
  • The knowledge levels within regulators in the area of operational risk management and measurement are generally low and theoretical, while knowledge retention suffers from staff attrition; and
  • There are high levels of inconsistency and a lack of co-operation at the international level.

There are many exceptions, however, and several regulators have received recognition for their leadership in the areas of operational risk, which is clear from the individual regulator results although these will only be made available to the regulator concerned.

Mike Finlay, CEO of RiskBusiness International, comments: “With more than a decade having passed since the first steps to formalise operational risk at the regulatory level were taken, it is of concern that many market participants – across the entire spectrum of the industry from retail banking, through investment banking, asset management, fund management and insurance – still do not have the transparent level playing field with suitable, risk-based supervision which the original working groups sought to implement. In many countries, operational risk is a game played between supervisor and participant – the regulator issues regulations and the participants do the minimum to comply with those regulations. And while this game goes on, major financial losses are suffered by these same firms and by the industry overall. All evidence shows that extreme loss events arise due to operational risks which are not adequately managed – it is time for all market participants and their regulators to accept that operational risk is much more than a game and to work together to safeguard the global financial markets”.

The headline results are as follows:

  • 28% of respondents believe the regulations issued by their supervisors are “complete but unclear”, with only slightly less describing the regulations as “clear but incomplete” (26%) and “very clear and complete”.
  • The survey found that 49% of the regulations issued conform mostly to Basel II with some national discretions. Similarly for Solvency II, most respondents from the insurance industry said the regulations conform mostly to Solvency II with some national discretions.
  • 51% of respondents said that their regulators were “somewhat approachable”.
  • 40% of respondents said that only some guidance was offered by their regulator although more than 31% of firms described the guidance given as “good”.
  • The level of regulators’ detailed knowledge of operational risk was low, with only 16% describing it as “very detailed”. The majority of regulators, some 34%, were described as having some knowledge of operational risk, with 31% described as having “detailed knowledge”.
  • Consistency was rated as “somewhat consistent” by the majority of respondents (45%).
  • 45% of respondents described their regulators as being “quite fair”, and 18% called then “very fair”. Slightly fewer at 16.5% said their regulator acted unfairly, with only 4% describing them as “very unfair”.
  • The degree of interaction between home and host regulators was described as “good” by 46%, although 28% described it as “average”.
  • The majority consensus of respondents, 24%, was that their regulator participated in industry discussion but did not lead them, while 23% said their regulator makes some effort to facilitate discussion.
  • 42% of respondents said that regulators were good at consulting with the industry and taking some of their comments on board.
  • More than half of all respondents stated that there was a low staff turnover at their regulator, with good knowledge retention.

For more detailed analysis please refer to the attached report.

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