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2019 Risk Management Market Summary – Asia Pacific

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2019 Risk Management Market Summary – Asia Pacific A SHEFFIELD HAWORTH PUBLICATION ASIA PACIFIC RISK MANAGEMENT Market Trends, Industry Analysis and People Moves 2019 Market Summary Jonny Warner 2019 Market Summary – Asia Pacific Risk Management MARKET OVERVIEW Whilst 2019 will not be viewed as a year of major hiring activity across the risk management market, it can certainly be looked back upon as they year in which non-financial risk management (NFRM) has gained even greater prominence and standing in the CRO’s mandate; perhaps somewhat ironic in a year that has seen significant economic challenges and subsequent market volatility and financial risk. The awareness that firms will need to increase their capabilities within areas such as conduct risk, political risk and resiliency is certainly there, however the question is: are firms prepared for it? An historic focus on financial risks (note the ratio of CROs from a credit risk background versus other risk types) coupled with a talent pool in Asia that is already limited in emerging risks will present a natural inhibitor in sourcing the best talent, creating the right teams and embedding best practice. • Whilst political risk is not a new area of focus for the CRO CONTENTS function, the ongoing unrest in Hong Kong, coupled with ongoing geopolitical considerations across China, Southeast Asia and the ‘West’ has shown the ability to ▪ Market Overview manage and mitigate this risk type is as important as it has ever been. ▪ Non-Financial Risk Management • Enterprise Risk Management (ERM) continues to develop across the market with more than three quarters - Emerging Risks: The of risk management functions indicating they have an ERM New Norm program in place and a number of others also indicating they are in the process of implementing one. - Cyber Risk “If the years after the GFC were characterised by - Political Risk increasingly tight capital controls and management of ▪ Wider Risk Management financial risks, the next few years will likely be defined Trends by tightening controls on conduct and culture” ▪ Looking ahead to 2020 ▪ People Moves • Elsewhere, activity remained muted in the more ▪ Contact Details traditional risk types with both credit risk and market risk seeing limited hiring activity across core APAC locations (compared to historical activity). Indeed, whereby a firm has been required to hire into a new capacity or backfill a role as a result of attrition, a significant number of these have been done via internal mobility; particularly at the most senior levels with cost continuing to prove a key consideration and influence. • Firms continue to target greater continuity and integration of risk processes and polices and drive greater interaction between risk types. This is, however, more challenging owing to the increasingly broad and typically qualitative nature of NFRM and firms will need to focus on developing this across all three lines of defence and hiring talent with an ability to embed a suitable culture across the organisation. This is a private and confidential document prepared by Sheffield Haworth 2019 Market Summary – Asia Pacific Risk Management NON-FINANCIAL RISK MANAGEMENT EMERGING RISKS: THE NEW NORM Although one cannot justifiably classify risk types such as operational risk as an emerging trend – even in Asian markets that traditionally lag behind western counterparts it is no longer a new topic – the wider acceptance and classification of broader non-financial risks (NFR) that incorporates, but goes well beyond principles such as operational risk is something that has certainly come to the fore more recently. Deutsche Bank, the pioneers in this space, first embedded the principle of NFRM into their CRO function in 2017, allowing the CRO effective oversight and management of a myriad of emerging risk types that previously would have been managed in a siloed manner. Credit Suisse have also adopted a similar approach and although we are yet to see this adopted across the investment banking landscape, attracting individuals with experience across emerging risks such cyber, conduct and political will provide the basis for this development. Add to this ever-increasing regulatory scrutiny – Australian banking continues to provide a case in point – and the need for firms to significantly improve their capabilities and invest in NFRM is evident. Success of NFRM will depend not only on identifying strong talent, but also on the ability for a risk function to develop consistent taxonomies across the function. With a constantly growing list of risks to manage, having the ability to identify and analyse both financial and non-financial risk, across the business and all lines of defence will be paramount to success. This also relates back to two other key areas of focus for CROs; enterprise risk and the risk culture across the organisation, and effective use of data and risk infrastructure systems across the different risk types. CYBER RISK Like other non-financial risks, cyber risk is certainly not a new consideration for CROs, however in the continually evolving world that is risk management and the wider financial services industry, how to manage this increasingly challenging and prominent risk is of utmost importance. Indeed, in a recent Deloitte survey, 67% of respondents indicated cybersecurity is one of the top three risks they expect to increase in the next two years. Progress has certainly been made and in many cases firms have now both established a suitable Cyber Risk / CISO function and associated cyber risk strategy, however the focus now must be on identifying individuals with the requisite combination of technology and business acumen to lead this development. Hiring trends will be different to more traditional risks and in order to target the best talent, firms continue to look further afield into corporates, major technology corporations and Fintechs. POLITICAL RISK As political unrest in Hong Kong looks set to enter 2020 with no resolution in sight, the US-China trade war continues to evolve and the UK reacts to the recent election results, political risk will no doubt weigh heavily on the CRO’s mind. The issue, however, is that having previously not operated with truly dedicated NFRM capabilities, geopolitical risk has been widely overlooked at a global scale; only 35% of institutions indicating that they are effectively managing political risk. Asia may not be subjected to some of the political risks that occur in other geographies such as MEA and LatAm, however given the hugely diverse and complex nature of the political landscape across Asia, firms across both the sell-side and buy-side, will need to ensure they are able to adapt themselves to the evolving nature of political risk and ensure it is appropriately managed as part of their wider NFRM function. This is a private and confidential document prepared by Sheffield Haworth 2019 Market Summary – Asia Pacific Risk Management WIDER RISK MANAGEMENT TRENDS Hiring activity and associated developments within Credit Risk continue to occur at a steady rate, although given the maturity of this risk type in Asia versus the new emerging risk types, the majority of said activity has been in replacement hires rather than newly created roles. Reduction of headcount is also continuing at a number of institutions and cost-cutting measures have seen individuals – particularly at the director level - ‘let go’ or simply not replaced following attrition. Outside of traditional, 2nd line of defence credit risk roles, discussion continues around the relationship between the 1st and 2nd lines and the role credit professionals play in both. To this note, Sheffield Haworth has been engaged in early conversations regarding a handful of credit roles that will serve as a ‘liaison’ between credit risk, relationship management and portfolio management. Without attempting to pre-empt 2020 market conditions, in light of the challenging economic climate, Sheffield Haworth has also had preliminary conversations with select credit and business heads regarding the restructuring/workout landscape. Whilst a handful of changes and new hires being made into Market Risk functions at the major institutions have been observed during 2019, in general this risk type remains mature and somewhat lethargic, particularly at the mid-level of the market. Similarly to credit risk, firms are taking the opportunity to right- size their market risk functions and using attrition as a way to distribute responsibility amongst the more junior staff. As alluded to earlier, Enterprise Risk Management (ERM) continues to gain further traction amongst the risk community with the majority of firms now operating with a focused ERM program, or in the process of creating one. There continues to be debate in the market as to what an ERM function should ultimately have oversight of (such as regulatory engagement, data and IT), however consensus can certainly be found in the ‘cultural’ role of ERM with the function aiming to achieve greater collaboration between the business and the risk function and embedding the risk culture across the firm. LOOKING AHEAD TO 2020 ▪ Much conversation around the ongoing political situation in Hong Kong has centred around its ability to attract and keep talent within the financial services sector. Singapore, albeit perhaps not publicly, will be delighted about the opportunity of soliciting some of the region’s top talent from Hong Kong should individuals decide a more stable political and economic landscape is a key career driver. To date, we have not observed a material impact on resident looking to leave Hong Kong, however if the situation continues well into 2020, one can reasonably expect this to grow. ▪ ESG has become a staple focus point for many firms and will continue to grow in importance in light of current global initiatives. In addition to this, expect increasing focus on climate risk (albeit a different nature to that recently experienced in Eastern Australia), as the widespread transitioning to zero- carbon economies creates new challenges and potential risks across credit and lending as well as the wider risks of the transitions themselves and what this means from an economic perspective.
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