20021119 \  Märkte & Trends \  Banking on risk management with EDM
Banking on risk management with EDM
Amid the general uncertainty of the economy brought on by the failure of dot.com companies, terrorism, stock market volatility and the Enron and WorldCom scandals, banks and financial service companies have had to increase their focus on both risk management and operational efficiency. It is therefore, perhaps ironic that the Financial & Banking Services sector now offers EDM and Workflow vendors alike such a potential opportunity for new business. With new legislation coming on line both in the UK and internationally, the management of Operational Risk is now an issue, which should be high on the agenda of all financial service companies.
The Bank for International Settlements (BIS) Committee on Banking Supervision (known as the Basel Committee) has now published its work relating to operational risk. It recognises that operational risk management is central to the development of sound risk management practice in modern financial markets. Operational risk most importantly involves breakdowns in internal controls and corporate governance. Such breakdowns can lead to financial losses through error, fraud, or failure to perform in a timely manner or cause the interests of a bank to be compromised in some other way. This includes loss of reputation arising, for example, by its dealers, lending officers or other staff exceeding their authority or conducting business in an unethical or risky manner. Other aspects of operational risk include major failure of information technology systems or the impact of external events such as major fires, terrorism or other disasters.
Based on the Basle Committee recommendations, the UK Financial Services Authority (FSA) ( http://www.fsa.gov.uk ), the UK’s independent regulator for the financial services industry, has drawn up a 76-page consultation paper (CP142) “OPERATIONAL RISK SYSTEMS AND CONTROLS,” which sets out guidance to firms on the establishment and maintenance of appropriate systems and controls, to encompass such areas as managing employees in relation to operational risk, managing inadequacies in a firm’s processes, outsourcing and business continuity management. After 31st December 2002, CP142 as currently drafted, requires financial organisations to create an operational risk structure by 31 December 2003. Among the key requirements is that firms must be able to create 3-5 years of loss data in a stylised format. Firms are now struggling to get hold of that data because it may be held in so many different formats in multiple databases and locations. Indeed, many of the key fields may not even be coded in the manner required to enable efficient data extraction.
According to Dennis Cox, Managing Director of Risk Reward Limited, ( http://www.riskreward.ltd.uk ), a Financial Services Risk and Strategic Management Consultancy, “The FSA’s formal proposals represent a great opportunity for EDM vendors to apply their technology to aid Financial Organisations to not only meet the requirements of the CP142 initiative but also to improve audit trails, productivity and above all security. Failure to comply with CP142 will not only potentially result in regulatory sanction, but there is likely to be a loss of competitive advantage which UK based financial organisations cannot afford to ignore.
At a recent OIT UK ( http://www.oituk.com ) user group meeting held at Blenheim Palace, OIT’s President Scott Buchart, emphasised the importance of EDM and Workflow as essential productivity and legislative tools for the financial sector and in particular to meet the demands of CP142. “OIT’s roots lie in the finance sector and nowadays it is not enough to store a report, display it and print it, financial organisations need to take a report, rip it apart, data mine it and extract information.
Data security is a hot button issue,” continues Buchart. It is not just defence from hackers but also protection from physical data loss through some kind of disaster or from unauthorised destruction of data. By applying web-based EDM, Imaging and workflow, financial organisations can have secure access to multiple format documentation across an Enterprise via a common interface.
Dr Vijay Magon, OIT UK’s Technical Director adds, “In our experience, the implementation of EDM and Workflow in financial organisations has resulted in a speeding up of creative and collaborative processes and the resultant audit trails can show who did what and when to a document. Multiple servers talking in parallel to multiple databases and storage devices not only protect data but also maintain the flow of information to the user in the event of hardware failure. Digital signature technology is also helping to improve data security so that electronic or image-based documents can still be authorised without so much as a drop of ink being used.
On the subject of CP142, OIT’s Buchart feels that, “While CP142 is an important direction for the financial community to take in attaining common standards of practice, I think it will take some time for these organisations to take it onboard. However, by developing the right partnerships and providing finance companies with a robust and secure IT infrastructure for their mission–critical data, we are confident that the requirements of CP142 will be met.” 
Jeremy Crame, Managing Director of EDM Vendor, Hitec Laboratories is firmly behind any means to apply EDM to meet the recommendations of CP142, “As an active player in the Financial & Banking Services sector, we keep very close to the new challenges facing the market and have identified opportunities for our EDM solutions with particular regard to CP142: Operational Risk Systems and Controls, Operational risk management failures can significantly disrupt the quality and continuity of a firm's business activities. Our focus therefore for 2003, is centred on educating and communicating the message that we are able to assist in this area.
Risk Reward’s Dennis Cox sounds a word of caution to those vendors who consider the financial sector as simply another market to apply generic solutions to, “The ability of vendors to meet the developing needs of the financial community though IT must first come from an understanding of risk management and the way it operates in a financial institution. There are a range of requirements and a range of solutions, but they must all start with a detailed understanding of risk and risk management. There will be many challenges along the way, including being able to seamlessly link into line of business applications without disrupting the way these companies run. It is probably only through partnering with specialist financial consultants to guide and support the approach taken by individual EDM vendors that those firms with the right integration skills will gain a significant foothold in this market.”  (CC)
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