I spoke with Alain dos Santos to looking at issues facing risk management for 2021.  Alain is founder and CEO of an independent boutique consultancy firm called Neofin Advisory. Neofin advises banks and asset managers in four key areas: i) strategy and organisation, ii) sustainable finance, iii) risk and regulation, and iv) data analytics and technology.

Alain has nearly 20 years in both the financial and consulting industry including as the Head of UK for a specialised European consultancy firm.  He began his career in London at RBS, before joining Deloitte then Oliver Wyman where he has covered key subjects such as; Brexit, Governance review and optimisation, design of target operating models, ESG, climate change, ICAAP/stress tests, AIRB/IFRS 9/TRIM, RPA and Machine Learning. 

What do you think will be the top three trends/challenges for risk management in 2021?

The first challenge will be to transition out of the regulatory wave that started after the 2008 crisis. More specifically, all remediation activities within credit risk where IRB and IFRS 9 models still require significant adjustments. On the non-financial risk side, financial institutions will keep investing to strengthen their operational and business resilience whilst further work on Conduct should be expected. Additionally, I expect large programmes such as IBOR transition and post-Brexit arrangements to also consume resources and time on the risk management agenda until the end of the year.

Secondly, emerging risks such climate change and cyber – even though these have been on CRO agendas for a while now – will be another key focus. And finally, the third challenge / trend could be the much-expected acceleration of the transition to increased automation and further integration of RPA/AI solutions. The revolution in this space for Risk Management is yet to come.

What challenges does remote working present for risk management?

Like in any transition, there are known and unknown challenges ahead. I would probably pick two: the first one is linked to day-to-day operational activities where financial institutions need to ensure an appropriate approach to working remotely, taking into account their respective risk culture. This is not just about having a stable connection and being able to join busy, back-to-back video calls throughout the day, but rather rethinking how teams retain their risk management culture and capabilities, whilst having to integrate different levels of stress and disruption originating from the pandemic. For example, the risk culture within an organisation is likely to be weakened due to reduced interactions, fewer informal chats or one-to-one sessions with SMEs, which we know have been critical in shaping stronger risk management cultures in the last 10 years. This is particularly relevant among more junior team members and new joiners.

The second challenge relates to cyber risk. As remote working becomes more established, exposure to cyber risk will increase. I don’t believe that the industry has yet had the opportunity to test all frameworks and capabilities developed over the last few years, so it will be interesting to check how well some banks will do compared to others. It will also be interesting to see how regulators look at it, particularly in light of the recent operational and business resilience regulatory initiatives.

What do you think the PRA’s priorities are for 2021?

The obvious one is to ensure that the latest regulations are implemented and well embedded. There is still a lot of focus on model remediation activities. Still, climate change is definitely a priority and its inclusion in this year’s stress testing exercise is a clear message that banks need to take climate change risk very seriously. In my opinion, this initiative will be a great pulse check for the industry as it will give more clarity on where large banks stand and whether/when they can meet the ambitious goals that have been set.

Also, we shouldn’t forget that we now operate in a post-Brexit world. The PRA is already playing a bigger role in its oversight capacity of foreign banks with branches in the UK. We expect the UK regulators to go into greater supervisory depth in order to review group level information from outside of the UK. However, the bigger question for me is whether we should expect a change in direction from UK regulators that would be led or influenced by the political, social and economic agenda and eventually play a role to ensure that the City remains an attractive place to do business.

What impact do you think the pandemic will have on IFRS 9 modelling?

This is a very interesting one. To put it mildly, the pandemic may have tested the IFRS 9 models to their limit. In the short term, it has triggered the need to review and re-calibrate models. In the medium term, it could well prompt structural changes to the way provisioning is estimated and managed. I think we are still learning to navigate through these strange times so let’s wait and see.

You chose to launch Neofin Advisory in February 2020, how has the last year been and what is it like running a start-up during a global pandemic?

Less than one month in, it became clear to me that the overall context was not going to be favourable at all. When you launch a new business, the first years are always going to be difficult and it is not unusual to face challenges you had not anticipated and, thus, planned for. 2020 went beyond any scenario I could have imagined, as I am sure was the case for many businesses unfortunately. So, to your question on ‘how was 2020 for Neofin Advisory’, what comes to mind is that we need to multiply our efforts by 10 to get a 10^th of the return we would expect under normal circumstances. I think that what kept us going was to not deviate or get distracted from the longer term goals and the real purpose of embarking on such a wonderful journey whilst being as creative, dynamic and flexible as possible in the short term to find solutions to get us through this. So far so good but 2021 is likely to be another difficult year, so this is far from being over.

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