29 January 2024

Lessons for Risk in Deloitte regulatory outlook

As financial services firms navigate a complex risk landscape in 2024, new questions are emerging around risk talent and staffing.

Risk management is becoming more data-driven, technically specialized, and business-integrated at the same time that competition intensifies for scarce expertise.

This combination of surging talent demand and constrained talent supply will spur Chief Risk Officers to reimagine their operating and governance models.

Deloitte’s 2024 Banking Regulatory Outlook shows regulators are expected to ramp up banking and capital market firm supervision, which will significantly impact how companies manage talent teams.

MBK Search has pulled out these key themes from the report and what they mean for your hiring plans:

Manage Interconnections with Systems Thinking

“Risk has migrated outside the banking sector to non-bank financial institutions…”

Financial stability is threatened by risk migration beyond the regulatory perimeter. The report notes that “supervisors continue to use banks as proxies to manage risks in NBFIs.” Yet even the ECB questions whether banks can “indirectly” regulate shadow banks indefinitely.

Senior risk teams need to adopt systems thinking, mapping interlinkages between risks. With climate change, cyber threats, and geopolitics introducing new risk interdependencies, enterprise risk management requires fresh vigilance.

Adopt Agile Approaches to Regulatory Change

“Taking a siloed approach not only misses opportunities for firms to exploit synergies…but also increases the risk of ‘getting it wrong’.”

Regulatory initiatives are converging, spanning prudential reform, climate risk management, digital operational resilience, and duty of care. “Regulators expect firms to get implementation right first time,” the report emphasizes.

By cataloging requirements and their dependencies, CROs can realize efficiencies through synchronized design. Agile execution is equally vital — the scale of transformation demands that iterative delivery replace monolithic implementations.

Embed Commercial Risk Perspectives

“Boards and senior executives have a crucial role…in ensuring that firms take decisions and make investments now that future-proof their business models.”

From geopolitics to sustainability, structural changes generate risks but also opportunities. The report states: “Boards and senior executives have a crucial role to play in future-proofing business models.”

Leaders must infuse commercial perspectives into their operating models. Scenario analyses should evaluate the strategic upside, not just the downside. Risk-aware culture should shift from value protection towards value creation.

Mainstream Climate and Conduct Risks

“A key feature of the regulatory landscape for life insurers is the inter-dependence of risks and opportunities. Leaving prudential reform to actuarial teams, Consumer Duty to compliance, and climate-related risks to sustainability teams will not result in the best outcome.”

Emerging risk areas can no longer be relegated to siloed teams. Climate and conduct risks demand integrated governance, bridging prudential, compliance, and sustainability disciplines. Assign accountability to senior risk officers. Ensure sufficient resourcing. Routinely report key risk indicators to ExCo and the Board.

Adopt Holistic Risk Culture Diagnostics

“Firms need a willingness to make real change and tackle tough decisions. Boards should, through their actions, set the expectation for their organization that sustainability is integrated into all aspects of their decision making.”

Culture is revealed in actions, not words. Risk leaders should employ behavioral diagnostics to gauge culture – surveying conduct, monitoring key performance metrics, and testing decision dynamics with experimental simulations. Progress requires cultural transformation spanning all three lines of defense.

Expand Risk Capabilities with Partnerships

“As firms navigate these topics, they need to factor into their planning the acute shortage of technical skills. Following the UK CMA’s clarification of competition law rules, firms can also consider where there are opportunities to collaborate in the market to find solutions to the most complex challenges.”

With specialized capabilities scarce, risk executives should actively explore partnership models – with peers, academia and vendors. While joint ventures require care, they can rapidly scale emerging skillsets like data science, climate analytics and AI ethics. A coalition mindset will differentiate leaders.

Questions For Those Looking to Hire

As financial services firms confront mounting complexity, risk departments, in particular, face surging talent needs. Critical questions for chief risk officers include:

  1. Do we have specialized expertise in emerging areas like climate analytics, AI governance, and NBFI risk transmission?
  2. How do we cultivate these scarce capabilities – buy or build?
  3. Should we create a chief data officer role for enhanced data management?
  4. How do we retain talent amidst fierce competition – should expectations around remote work evolve?
  5. Is our talent pipeline sufficiently diverse to manage risks holistically?
  6. Are first-line analytical resources adequate for accelerated commercial decision-making?
  7. What partnerships or ecosystems can provide flexible talent access?
  8. With stretched recruitment, how do we incentivize cross-training and movement of talent into risk?

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