Top trends Risk Management & Compliance for FSI

Every business venture involves some risk, or deviation from the expected outcome of an investment. A higher-risk investment affords a wider range of possible returns. Understanding and mitigating variations in possible outcomes is the definition of risk management.

With the rise in cloud computing, cryptocurrency, and the digitalization of the financial marketplace, the compliance risk management process is getting more complicated than ever. In today’s increasingly decentralized and cloud-based market, when the law is struggling to catch up with rapid, tech-driven changes in industry, figuring out which government (or governments) you are being regulated by is a complex task.

Below, we’ll look at the major risk management and compliance trends in the cloud computing era.

Risk management in the financial service industry

Financial risk management is intertwined with regulatory compliance. You can’t exactly build a diverse investment portfolio when your financial service provider is under investigation for misconduct. With an estimated 91% of financial services organizations currently using or transitioning to the cloud within the next nine months, account decentralization and cloud computing concerns are at the forefront of regulation strategy. Effective risk management plans protect clients’ investments by ensuring impeccable compliance with these new regulations. If mistakes are made, both client investments and the future viability of the company are in jeopardy.

Keeping your system secure while also ensuring compliance means walking a tightrope between 404 errors on your customer-facing software and failing a tax audit. This risk management and compliance process is handled differently by financial institutions versus cloud service providers (CSPs). According to Noah Kessler, managing director of consulting firm Protiviti, financial institutions rely on human operations and interventions. They create additional teams of workers and hire new employees to address higher demand for services and to create resilience in architecture. Meanwhile, CSPs build resilience and manage service demands through automation and computerization.

As financial institutions move to the cloud, they may have to adopt a hybrid model for their risk management plan. Processes previously managed by human employees can be evaluated for their potential to be automated. However, it’s important to remember the customer-facing side of things. Your client finds herself locked out of her account. Will she stay your client if she calls your helpline and encounters an automated voice menu? Or are you more likely to retain customers by keeping an exclusively homo sapiens tech support team? Financial risk management teams that prioritize a human touch for the customers while maximizing the operational utility of automated systems are poised to succeed in this new paradigm.

Current risk management strengths

Incorporating CSPs into your risk management framework can strengthen your security. The rigorous safety standards of a good CSP can compensate for the decentralization of moving to the cloud.

Sometimes, however, the best risk management tools are the ones you already have on hand. Your legacy data storage system has been refined to perfection. Now that cloud services are indicated for certain operations, you can still work the tried-and-true servers into your enterprise risk management and compliance program.

Let’s say you decide on a 3-2-1 backup strategy for your data. You will need three or more total copies of your data. At least two of these copies must be on different media, and one must be stored off-site. The rule is easily satisfied by maintaining two on-site servers, each with two copies of this sensitive data, and sending the third copy to an off-site cloud provider.

Not sure what to keep and how much you should port to the cloud? Call in a consultant to assess and advise on operational risk management in your hybrid system. Having a third party evaluate your risk management strategies and verify your compliance process will bring you added security—and peace of mind.

A comprehensive risk management approach

Don’t just look at risk management versus compliance. An integrated approach to complying with industry regulations while managing risk is essential for the health of your company. Industry regulators want the same thing as you do—adequate protection for your clients’ investments in a volatile market. Working with regulators can yield novel insights into your current infrastructure, helping you refine your enterprise risk management while undertaking a full compliance review.

Carnegie Mellon researchers Levite & Kalwani (2020) organize regulatory trends into four categories: consumer dependencies on cloud services, CSPs as market players, the cloud services industry as a systemic force, and government dependencies on the cloud. They call attention to a recent investigation of the Financial Stability Oversight Council (FSOC) in the United States as an example of the difficulty distinguishing between financial institutions and their CSPs. Along with financial clearinghouses and exchanges with a connection to the global market, FSOC is considering CSPs as systemically important financial market utilities. This makes them critical infrastructure and subject to rigorous risk management protocols of their own.

In the end, this means that your CSP might have greater operational resilience and undergo more scrutiny than your on-site infrastructure. Transitioning services to the cloud can be a risk management tool in and of itself. Of course, you are still responsible for understanding the ins and outs of your outsourced data storage and operations. A flexible, modular, cloud-based enterprise must still account for end-to-end security. Plus, being able to articulate each step in your operational life cycle will make your compliance review run smoothly.

How will you manage compliance risks in the cloud computing era?

The definition of risk management is the mitigation or acceptance of uncertainty.

So how do you manage compliance risks in a world where this uncertainty is harder than ever to quantify?

Risk and compliance management solutions are closely tied to a watertight IT infrastructure. Hypertec offers robust IT solutions to financial services organizations moving their operations to the cloud.

With decades of serving the financial industry and a company history that dates back to the first server farms in Canada, Hypertec is well-placed to help you develop your cloud computing risk management process.