Chapter 5: Operational Risk Tools – Risk and Control Self -Assessment Flashcards
14% - expect 7 questions
Understand the nature and role of risk and control self-assessments in the assessment and management of operational risk.
- Risk and Control Self-Assessment (RCSA) is a tool used by firms to manage key risks. It involves** identifying**, assessing, monitoring, and reporting both new and existing risks, along with related controls, to prevent adverse impacts on the firm’s objectives.
Examine the nature of risk and control self-assessments in the management of operational risk
- Is a process used by firms to identify, record, and assess potential risks and their controls.
- It can be performed at various levels within a firm, from top-down reviews by senior management to bottom-up reviews in business entities.(how it can be implemented in a firm)
- RCSA is most effective when integrated into an operational risk framework and supported by clear risk governance and senior management engagement.(how it can be implemented in a firm)
- This process helps clarify the ownership of risks and controls.
Describe the benefits of risk and control self-assessments
Risk Control Self-Assessment (RCSA) is a proactive risk management tool that provides strong control support for business operations. It helps manage risks and take timely actions to address unacceptable levels of exposure, fulfilling regulatory requirements.
Benefits and uses of RCSA include:
Cultural: Embeds operational risk management at all levels, focusing on proactive risk management.
Alignment to Strategic Direction: Applies the firm’s risk appetite and tolerance practically, aligning business strategy with risk management processes.
**Interaction & Consensus: **Promotes open discussion of risk and control matters, improving transparency and understanding across the firm.
Ownership & Accountability: Assigns clear ownership of action plans and responsibilities for their delivery and monitoring.
**Record Capture: **Provides a mechanism to record and rank risks, supporting both ‘top-down’ and ‘bottom-up’ views of risk.
Driving Efficiencies: Improves business process efficiency and promotes a holistic view of critical processes or specific business lines.
Why do organizations implement Risk Control Self-Assessment (RCSA) in an integrated way involving both their risk process and business processes?
**Explain the role of risk and control self-assessments in identifying operational risk. **
Why is risk identification an important function of the Risk Control Self-Assessment (RCSA) and what components and sources assist in the identification of new or emerging risks?
* RCSA helps firms:
- Identify risks that could lead to financial losses or other negative consequences.
- Understand how likely these risks are to occur and their potential impact.
- Take appropriate actions to manage these risks.
** Identifying risks involves using various tools like:**
- Categorizing risks based on type.
- Analyzing past internal and external incidents.
- Monitoring key risk indicators.
- These tools help discover new risks and ensure accurate assessments of existing ones.
Additional sources of information for risk identification include:
* business objectives
* customer complaints
* details of planned change and transformation
* loss or event analysis reports
* internal audit reports.
* business planning processes outputs (like PESTLE or SWOT analysis)
* business performance management information
These sources help identify what could prevent the firm from achieving its objectives, flaws in processes, inherent risks or control failures, and potential operational risks due to changes in process, products, or strategy.
Should a firm’s risk categorisation scheme be used as the starting point for risk identification or as a means of validation to ensure that all relevant risks have been identified by other means? Why or why not?
A firm’s risk categorisation scheme can serve both as a starting point for risk identification and as a means of validation.
**Starting Point for Risk Identification: **It provides a structured approach for identifying risks, allowing the firm to systematically review each category for potential risks. This is especially useful for firms starting their risk management journey or when entering new markets or launching new products.
Means of Validation: It ensures all relevant risks have been identified. After identifying risks through other methods, they are mapped back to the risk categories to check for any overlooked category.
In practice, both approaches are often used in combination, ensuring a comprehensive and robust risk identification process.
A firm’s risk categorisation scheme is like a map that shows different types of risks (like financial, operational, etc.).
Starting Point for Risk Identification: You can use this map as a starting point when you’re on a ‘risk hunt’. It helps you think about all the different types of risks that might affect your firm.
**Means of Validation: **After your ‘risk hunt’, you can use the map again to check if you missed any type of risk. This is like a validation or a double-check to make sure you’ve considered all possible risks.
What are the three main approaches to performing a RCSA?
Workshop Approach: This involves interactive sessions with key representatives to discuss risks, controls, and improvements. It’s time-consuming but often yields relevant data.
Questionnaire Approach: This involves using comprehensive standardised questionnaires tailored to respondents’ responsibilities. It can be used for desktop reviews, structured interviews, or a combination of both.
**Hybrid Approach: **This combines various techniques, including workshops, questionnaires, interviews, and third-party reviews. It starts with a workshop, followed by a questionnaire or interview process to update the findings.
What are the advantages and disadvantages of the workshop and questionnaire approaches in Risk Control Self-Assessment (RCSA)?
Workshop Approach
Advantages: It allows for open dialogue, promotes a holistic view, ensures missing risks are identified, and provides an opportunity for transfer of risk management skills across the firm.
Disadvantages: It is time-intensive, can be affected by inappropriate attendees or inadequate facilitation skills, and requires an understanding of operational risk roles and responsibilities.
Questionnaire Approach
Advantages: It is less time-intensive, allows individual focus, can be done remotely or facilitated, and provides a physical record of contributions.
Disadvantages: The quality of outputs can be compromised if the ‘right’ questions are not set or correctly interpreted, it can result in differing views and opinions, and the terminology used can be misinterpreted.
What are the key concepts of likelihood and impact in the assessment of risks and controls in Risk Control Self-Assessment (RCSA), and how do they differ from each other?
Likelihood is the chance of a risk occurring, typically expressed as** low, medium, or high**. It’s based on judgment and observation.
Impact is the potential consequence if a risk occurs. It can be:
Direct (costs directly from the event) or indirect (consequential costs like loss of market share).
Financial (possible monetary loss) or non-financial (like reputational damage).
Consideration is given to impacts on the firm, customers, and the markets the firm operates in.
The Role of Controls in Risk Management
What are the four categories of controls used in risk management, and how do they function?
**Preventative: **Deter risks by addressing causes. E.g., regular inspections can prevent fire risks.
Detective: Identify occurred risk events. E.g., a smoke alarm detects a fire.
Corrective: Limit damage by mitigating impacts. E.g., sprinklers and evacuation procedures in a fire.
Directive: Policies directing control application. Relevant before or after an event, depending on the policy. E.g., an information security policy might be preventative, while a business continuity policy might be corrective.
What factors determine the effectiveness of a control in risk management, and how is this effectiveness assessed?
Control effectiveness relies on both design and operation:
- Effective design minimizes risk and covers all potential issues.
- Effective operation ensures the control works as intended, with sufficient resources, consistently.
* Firms assess control effectiveness through:
- Formal testing programs
- Management confirmation (attestation)
* Insufficiently controlled risks require mitigation actions to reduce residual risk exposure.
What are the roles and responsibilities of ‘risk owners’ and ‘control owners’ in a firm’s risk management structure?
*The Risk Owner is typically an executive responsible for managing risks within agreed risk appetite/tolerance.This includes the identification, assessment, monitoring, and reporting of risks.It’s usually the business line, the first line of defense, that runs and owns the risks.
* the Control Owner is responsible for the design and execution of appropriate controls. They monitor and assess control effectiveness and implement required enhancements as necessary.
What type of data needs to be captured in a Risk Control Self-Assessment (RCSA) risk log or risk register?
- Unique risk reference (system or manually generated)
- Risk description (including the event, its causes and impacts)
- Risk event category
- Risk owner
- Assessment of inherent likelihood
- Assessment of inherent impacts (financial and non-financial)
- Gross/inherent risk exposure
- Summary of controls and frequency of operation
- Control owners
- Assessment of control effectiveness
- Net/residual risk exposure
- Response decision based on appetite/tolerance
- Actions – detailing what will be done, by whom and by when
Action status - Target/expected risk exposure following completion of actions
What are the four recognized responses to identified risks in risk management, and how do they function?
**Risk Acceptance: **Risks may be accepted at the net/residual level if the exposure is within appetite/tolerance or if the cost of mitigation exceeds the exposure. Acceptance decisions should be documented and reviewed annually.
Risk Reduction: The introduction or enhancement of controls can reduce the impact or likelihood of the risk materializing.
**Risk Transfer: **Some operational risks can be transferred through insurance policies. However, mitigation by insurance can never be fully guaranteed.
Risk Avoidance: This is achieved by identifying and removing the root cause of a risk before it materializes. Examples include not entering a particular market or not offering a certain product or service.
What are the key steps and considerations in the re-evaluation and monitoring of risks and controls in Risk Control Self-Assessment (RCSA)?
Re-evaluation:
- Review any changes (environment, strategy, regulations, etc.) that might impact previously identified risks.
- Reassess the likelihood and potential impact of each risk, updating ratings as needed.
- Evaluate whether existing controls remain effective in mitigating the re-evaluated risks.
Monitoring:
- Track changes in risk likelihood, impact, and control effectiveness using Risk and Control Indicators (RIs and CIs).
- Integrate RCSA findings into regular business reviews and decision-making processes.
- Analyze risk indicator trends to identify potential issues requiring further investigation.
- Define clear triggers for action (exceeding risk tolerance or control weaknesses).
Considerations:
- Re-evaluate regularly, with additional assessments triggered by specific events.
- Utilize diverse data sources (internal reports, industry trends, audit findings, etc.).
- Ensure clear communication of re-evaluation results and necessary actions to stakeholders.
Describe common methods of reporting risk and control self-assessments
An effective RCSA report:
- Is relevant to its audience and guides the reader.
- Is timely, up-to-date, and evolves to meet organisational needs.
- Translates RCSA data into information with context and analysis.
The report includes:
**Executive Summary: **A concise overview of the RCSA outcome.
Scope: A clear description of the RCSA’s scope, including coverage and how the exercise was conducted.
Changes in Risk Profile: Notable movements in the risk profile assessment since the previous report.
Residual Risk and Control Assessment Results: Key data from the RCSA exercise, including descriptions of each risk and related controls, and their assessments.
**Action Plans: **Proposed responses to the reported risk exposures.
Heat Maps: Visual presentation of the risk profile, useful for management to quickly identify priorities. However, they are not sufficient in isolation and need supporting detail.
