Striking a Balance on Operational Risk

Just a few years ago, fund management companies were focused on streamlining transaction processes to boost efficiencies. As part of this process, some organizations outsourced back-office operations to third-party administrators (TPAs), while others off shored certain functions to lower-cost regions.

The outsourcing market for transfer agency is mature, with the major TPAs having sufficient scale to provide efficiencies and control. Following a wave of regulation over the last few years, transfer-agency participants are now just becoming able to lift their heads above the parapet on the regulatory side of things, as the majority of the preparations for major initiatives such as the Retail Distribution Review (RDR) and the Foreign Account Tax Compliance Act (Fatca) come to fruition. This, in turn, provides some needed breathing space for organizations to focus on the benefits of reducing operational risk, and realizing potential cost savings.

New Technology
Technology has an important part to play as it can introduce additional checks within existing functionality and automate ─ either partially or fully ─ those processes susceptible to risk. It can also provide new processes and tools to manage the growing dependency on automated real-time business processes.

A practical example of this approach is the use of dealer-to-client platforms. These allow investors to manage their own accounts, thereby reducing the risk of processing errors within the back office. At the same time, the administrator maintains efficiency as the automation required reduces the day-to-day servicing cost in servicing clients. The investor also benefits with an improved service whereby they can access and manage their accounts at their convenience on a 24/7 basis.

Automation can undoubtedly enabled significant improvement in productivity. The key to mitigating operational risk is striking the right balance between automation and protection.

Automation can undoubtedly enabled significant improvement in productivity. The key to mitigating operational risk is striking the right balance between automation and protection.

Balancing Act
One of the biggest moves in the transfer agency space most recently is towards an increased number of control points within end-to-end processes, resulting in several people monitoring aspects of each transaction. These changes are designed to reduce operational, financial and reputational risk. However, administrators must balance due care with wrapping too many people around a transaction. By applying over-rigorous controls, organizations run the risk of causing a drag on the back office, impeding their ability to bring new products to market and, ironically, introducing additional risks. It is about achieving a balance between making the processes work smoothly and having adequate controls in place.

This is the same across SMEs and larger companies. They are all working towards the same goals in this respect. Everyone has different views on how to solve a problem but generically the gut reaction is to throw extra people at it to make sure it doesn't happen again. This too often becomes a permanent solution in organizations and two years later no one knows why the process is as it is. It has just become the norm. A better approach sees organizations removing the root cause, putting streamlined solutions in place to fix the problem and thereby preventing it from happening again. Larger companies may be more inclined to put people on it for longer ─ they can afford to ─ but conversely, they should also be able to fix the root of the problem more easily than a smaller organization.

Any solution to balancing the management of risk against operational efficiencies is likely to be a subtle blend that:

• Identifies potential risks;
• Reduces those risks by reviewing processes in a controlled manner, and enhancing them where required to maintain efficiency;
• Finally, accepts risk, where the cost of trying to prevent it is greater than any other cost, be it operational, financial, or reputational, should it arise.

Neil Richards is the product manager, GTAS at Bravura Solutions. The opinions expressed are those of the author, and do not necessarily reflect those of either Waters or Bravura Solutions.