GLOBAL - Asset managers have yet to implement effective risk management to their practices and product development and could therefore cause further damage to their clients, suggests a study conducted by Ernst & Young, as many risk managers are still not being given the information or access they need to make assessments.

A qualitative and quantitative survey of 23 chief risk officers and heads of operational risk management found while companies have still not fully learned from the damage caused by lack of risk management in some areas last September, other factors such as conflicting regulatory consequence are making it difficult for departments charged with risk management to carry it out effectively.

Interestingly, those questioned said their biggest concern - even though it cannot be measured effectively - is reputational risk although third on the list was greater client scrutiny, in part because are still not able to access sufficient daily information to give investors, such as pension funds, the answers they seek.

E&Y said many risk management departments are expanding their responsibilities since the crisis took hold last year, yet the detail of information required by "discerning investors, regulators, and senior management is putting additional strain on the resources of risk function", with one respondent commenting that new investors now ask for the CVs of the risk team.

More than half of those questioned said bond and same-day valuations caused headaches for risk controllers because they were still having problems with third-party valuations and, more worringly, administrators were increasingly having to rely on fund managers for the information.

Companies are still unable to break down credit exposure by counterparty and product as only 13% were able to do so on a single day last year, and most companies are still separating counterparty and product risk, rather than having an overarching risk management strategy and one which sees officials involved earlier in the process of product design.

One comment received said "nine out of 10 custodians are struggling to perform some valuations - many are relying on the manager's modelling to get it right" yet reputational risk to the company is considered by 30% of respondents to be a separate category of risk on its own.

Dr Anthony Kirby, director at E&Y's regulatory and risk management practice, said the traditional division in risk management between corporate and operational risks is still leaving gaps and a lack of accountability over issues such as liquidity, product, and counterparty risk.

"It is telling that just three out of the 23 firms we polled were able to break down their risk exposures by counterparty and product on the same day in 15 September last year," said Kirby. "It may be challenging to devise comprehensive risk governance structures, but developing the necessary skills and data systems to keep on top of all potential risks should be front of mind for all CROs."

E&Y has suggested risk management could be tackled by embedding it as part of the business culture, and "make risk everybody's business".

In contrast, however, some improvements have been seen as many firms now tend to gauge counterparty risk through credit default swaps pricing, while companies are also taking more counterparty risk assessments.

At the same time, however, risk managers appear to be unhappy with the influence that sales and marketing teams can have on a product's design as the survey found a quarter of respondents believe "portfolio risk management is too open to front-office involvement" and risk is only considered at the end of the product design chain or, worse, after its launch.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

Topics