People Risk Management at Banking and Financial Institutions

Risk management in banking and financial organisations of all shapes and sizes have been traditionally an integral part of their functioning. A large part of it is driven by banking regulatory requirement given the nature of business such organisations are in, i.e., money management. Hence, safe guarding a bank from unwanted incidents/accidents that can risk people’s money (and in turn economy at large in eventuality) takes as important a place as generating business and profits for financial institutions. No other industry is as vulnerable as the banking and financial industry when it comes to varied risks, having a potential to collapse even an excellent run organisation – big or small. Such is the strength of risk. When not managed well, it can cause havoc of any magnitude that can crash not only the organisation and the financial industry, but it can also lead to devastating effects to crumble a nation’s or the world’s economy in no time.

So, the question is, why do such risks play out in spite of robust risk management practices to manage critical risks such as Credit Risk, Market Risk, Liquidity Risks and Operational Risk in organisations? Today, world class statistical models, highly evolved control and governance mechanism, skilled expertise and superbly engaged Central Banks monitor the financial industry, enabling it to proactively manage these critical risks. Still, risks play out every now and then affecting the organisations’ reputation and finances.

What is People Risk or Human-Factor Risk?

Human-factor risk in any financial organisation is the root cause of failure for other risks. People risk precedes all other risks and is caused by people internally within the organisation or from outside. When people risk is inadequately understood and ineffectively managed, it causes other critical risks to snowball and avalanche. Some world class financial organisations have recognised the importance of managing people risk while others across the world are still at an emerging stage to determine how to incorporate people risk management in an overall framework of risk management within their organisation.

How Does People Risk Occur?

People Risk manifests through behaviour of people within or outside organisation i.e., action of employees and third-party partners, if error-clad or malicious, can lead to control and governance failure built around processes, systems and activities. In turn, a failed process or a system exposes the associated risks to take place leading an organisation to incur a loss of either financial, reputational, or regulatory nature or all of them. It is people who propel an organisation into the heights of success, but it is also people who can render it to fall like a towering pack of cards.

Why Do People in Organisations Cause Risk?

Human errors, malicious actions or fraudulent intentions by people lead to loss or harm. While a lot of human errors can be caught, managed or prevented through organisation’s control, monitoring and governance mechanism, most malicious intentions and actions are often hard to identify, monitor or prove.

There are numerous examples across banks worldwide where losses were caused on the part of human errors with no malefic intentions. A lot of such people’s activities can be attributed to:

• Lack of skills and inadequate professional training
• Absence of sound standard operating procedures
• Poorly defined roles and responsibilities
• Chronic work overload and cognitive fatigue

More often, personal self-serving interest, inaccurate or flawed judgement or decisions, unhappy or disengaged employees, flawed internal organisation culture, greed, and lack of integrity in conducting one’s responsibilities are bigger behavioural misdemeanours that cause the greatest damages.

How Can Organisations Manage People Risks?

Clearly, organisations need to adopt a two-pronged approach to prevent and manage people risks:

A consistent high level of professional culture requires building of deep behaviours of integrity, transparency and responsibility among people. Any organisation’s long-term guard against people risks is hidden within these fortifying behaviours. The practice of these measures on a day-to-day basis by its people safeguards the organisation from any risks.

Information Technology and AI Can Help Prevent Much of People Risk

A robust People Risk Index which can deliver valuable information on people risk will require organisations to leverage or deploy IT-based capabilities. Appropriate IT intervention should be designed to bring together and analyze multitudes of people data from various internal systems, reports, applications as well as external environment.

Technologies such as Artificial Intelligence (AI) and Machine Learning (ML) can further make this complex data analysis more accurate, real-time, dynamic and relevant. These data will deliver people risk insights to senior management, people managers and HR through People Risk Index in real-time – enabling them to make informed, timely and impactful decisions in response to emerging or potential people risks and issues. Technology backed People Risk Index can enable organisations institute a culture of preventive measures to eliminate or mitigate high-impact people risks well in time.

Who Should Own People Risk in an Organisation? Role of the HR Function

The Board or Senior Management must consider People Risk as an accountable variable. However, the HR function in an organisation plays the vital role to drive management of People Risk given their influence and reach across the organisation. As People Risk is significantly associated with people behaviour, HR is best placed to take lead in this area and manage this by mobilizing resources, skills and systems with support from businesses and functions.

To conclude, HR, from their position of strength in the organisation can regulate right behaviours, policies, procedures and systems by collaborating across all levels in the organisation in cohesive and synchronized manner – in support of making People Risk Management an inseparable cultural reality.

Conclusion