Cleri Nearhou
Are you aware of the potential risks that can affect your fund operations?
Operational risks pose a significant challenge in the financial industry, encompassing errors, process failures, compliance breaches, data security threats, and more. In this article, we will break down what constitutes an Operational Risk in Fund Administration and explore some effective strategies for mitigating these Risks.
What is Operational Risk?
Operational Risk is the risk of loss resulting from errors or omissions, process failures, inadequate controls, human error, and/or failures in underlying support systems or from external events. These risks come in various forms, including external fraud, compliance lapses, data security breaches, mispricing risks, business continuity disruptions, and environmental, social, and governance (‘ESG’) risks. Imagine a scenario where an external fraud incident compromises the fund's assets, or a compliance failure triggers regulatory penalties and reputational damage. Data security breaches can expose sensitive information, leading to legal liabilities and loss of investor trust. Mispricing risks on net asset value can impact investor returns, while business continuity disruptions can interrupt fund operations and cause financial and operational setbacks. Additionally, in today's ESG-focused landscape, fund administrators must be vigilant in managing environmental, social, and governance risks to meet evolving investor expectations and regulatory requirements.
How to best tackle Operational Risks?
To successfully tackle these risks head-on, it is crucial for funds to appoint a designated Risk Manager and simultaneously develop an operational risk management framework, tailored to the particular characteristics of each Fund. Factors to take into consideration when establishing this include:
- Risk control self-assessment methodology. This is a structured approach that involves identifying, assessing, mitigating, and monitoring risks across all levels of the organization.
- Set well defined Risk priorities, Lines of Defense and Escalation Protocols, such as clearly outlining the importance of risk management, establishing multiple layers of controls and safeguards, and defining a clear process for escalating issues to higher levels of authority
- Incident and error tracking, review and remediation, such as implementing a comprehensive incident tracking system that records and analyzes operational incidents and errors, conducting regular reviews to identify root causes and patterns, and implementing corrective measures to prevent similar incidents from occurring in the future
- Generating scenarios on potential operational risk incidents, such as simulating various risk scenarios and their potential impact on the fund's operations.
Let’s focus on the Risk Manager
Introduced above, this person is crucial for the Fund’s line of defense against operational risks. He is responsible for analyzing data and producing management reports deriving from this analysis, while also identifying weak internal controls that may exist. He performs regular assessments, at least once a year, and helps to identify operational value at risk and guide corrective actions -if deemed necessary-.
What more can we do to safeguard against Operational Risks?
In addition to the above tailored approaches, there are generic mitigation strategies that all funds should consider. These include:
- Implementing strong Internal control procedures and processes (e.g., segregation of duties, regular review of financial transactions)
- Executive Board - approved investment guidelines and benchmarks for external asset managers (e.g., setting investment limits, monitoring performance against benchmarks)
- Conducting independent audit arrangements: independent external audit, oversight of controls and financial processes by an independent external audit committee (e.g., engaging a reputable external audit firm, conducting periodic internal audits)
- Establishing an internal audit. An integral component of robust risk management is maintaining an internal audit function. By establishing an internal audit team, funds can enhance their risk management capabilities, gain independent assurance on the effectiveness of controls and processes, and strengthen overall governance.
In conclusion
Effective risk management in fund administration is paramount for ensuring the smooth operation and long-term success of your fund. By implementing tailored strategies to mitigate operational risks and embracing generic mitigation practices, you can strengthen your fund's resilience and protect its stakeholders.
How can we help?
At Royal Pine, we offer comprehensive support with all phases of a fund’s lifecycle, from the establishment of the fund to administering all ongoing reporting and regulatory requirements.
Our team can assist you with a complete fund administration solution.
Don't let operational risks hinder the success of your fund! By adopting the right strategies and partnering with Royal Pine, you can confidently navigate the complex landscape of fund administration while minimizing potential risks!
* This publication has been prepared as a general guide and for information purposes only. It does not purport to be comprehensive or to render professional advice. Before making any decision or taking any action that may affect you and/or your business, bespoke advice should be obtained.
