[OR] [RBI] [9] Control and Mitigation

Control and Mitigation in Operational Risk Management

Control and mitigation are critical components of a practical risk management framework, focusing on reducing the likelihood and impact of potential risks. Control measures involve implementing policies, procedures, and practices that prevent or minimize the occurrence of identified risks. Mitigation strategies, conversely, are designed to lessen the severity of risks that do materialize, ensuring that their consequences are manageable and do not disrupt the organization's objectives. Organizations can create a robust defence against risks by integrating control and mitigation efforts, enhancing resilience and stability in an unpredictable environment.

Principle 9: Robust Control Environment

Financial institutions (REs) must establish a robust control environment through comprehensive policies, processes, systems, and appropriate risk mitigation strategies. This ensures efficient operations, asset protection, reliable financial reporting, and compliance with laws and regulations.

Critical Components of Control and Mitigation

Internal Control Framework

• Risk Assessment: Identifying and evaluating risks.
• Control Activities: Implementing actions to mitigate risks.
• Information and Communication: Ensuring relevant information flow.
• Monitoring Activities: Regular review of control effectiveness.

Policy Compliance Assessment

• Regular reviews to ensure adherence to objectives and controls.
• Verification of compliance and resolution of non-compliance.
• Evaluation of approvals and accountability measures.
• Tracking deviations from policies, regulations, and laws.

Operational Continuity

Controls to ensure business continuity during normal and disrupted conditions, aligned with operational resilience strategies.

Segregation of Duties

• Avoiding conflicting duties to prevent concealment of inappropriate actions.
• Implement dual controls and monitor areas prone to conflicts of interest.

Traditional Internal Controls

• Established authorities and approval processes.
• Monitoring adherence to risk thresholds.
• Safeguarding assets and records.
• Ensuring adequate staffing and training.
• Verifying and reconciling transactions regularly.
• Enforcing mandatory leave policies for employees in sensitive positions.

Technology in Control Environment

• Leveraging automated processes to reduce errors.
• Implementing sound technology governance to manage associated risks.

Technology Risk Management

Integrating technology risk management with overall Operational Risk Management, acknowledging the potential for material financial loss.

Third-Party Risk Management

• Managing dependencies on third-party service providers.
• Addressing concentration risk, complexity, and downstream dependencies.
• Monitoring and mitigating risks associated with third-party relationships.

Risk Transfer Strategies

• Utilizing insurance to transfer risks not adequately covered by internal controls.
• The Board of Directors should review the institution's risk and insurance management annually.
• Recognizing that risk transfer is complementary to, not a replacement for, internal controls.

Evaluating Risk Mitigation Tools

• Assessing the effectiveness of risk transfer tools like insurance.
• Considering the potential creation of new risks, such as counterparty or legal risks.
• By implementing these components, institutions can ensure a robust control environment that mitigates operational risks and enhances operational resilience.

More Information About Blended Learning OR-5000 [OR-5] or OR-300 [OR-3]

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