Every business, no matter how small or uncomplicated, has risks. When you can identify the risks, you can establish a plan to manage them.
Section 37(2)(b) of Board Notice 194 of 2017: Determination of Fit and Proper Requirements for Financial Service Providers (FSP), which forms part of the governance requirements for FSPs, legally obliges FSPs to have a risk management plan. However, your plan can only be effective if all the risks in your business are identified and managed.
This article, Part 1 of Risk Management, will provide you with insight to what some of these risks are and the areas in which risks can be identified in your business by considering the FSP as an ecosystem.
Consider that FSPs operate in the highly regulated financial services sector with role players and stakeholders. Whether your FSP is a company, close corporation, trust, sole proprietor or other entity, it has an ‘ecosystem’. The elements in a typical FSP ecosystem comprise product providers; clients; regulation; staff, including yourself; and your estate. Each of these elements has inherent risks.
Product providers as a risk
Product providers pose a risk, as they are an integral part of your service delivery cycle and their service reflects on your business. It is therefore necessary to monitor the service from product providers to ensure clients’ needs are not prejudiced by poor service, including late payment of claims, delays in the allocation or collection of funds, or repeated administrative delays.
Clients can also be a risk, as they can impact your reputation. Unhappy clients can significantly damage your reputation if they share their bad experiences on social media or even to friends or peers. On the other hand, a satisfied client who experiences value is likely to recommend your service to others.
The principles of Treating Customers Fairly (TCF), which form the basis of the General Code of Conduct, should reflect in your business culture, advice process and value proposition. You can assess TCF or client risks by continually reviewing your FSP’s activities and indicators such as product suitability in the advice process, early terminations, complaints, and non-payment of claims.
The risks of regulation
The risks related to regulation may be realised if you are not aware of what is required of you, or you know what is required but do not comply.
New regulation and amendments to regulation have flooded the financial sector in recent years. The Conduct of Financial Institutions (COFI) Bill is also expected to come into effect soon. Ensuring that you are up to date with regulation and continuously complying with applicable laws, codes and notices is a heavy burden. Your risk management process should therefore include monitoring and tracking of applicable and changing regulation. You can learn more about our Regulatory Update webinar where you can gain an understanding of the key regulatory changes that affect your ability to run a successful business.
Staff / Partners
Staff and any contracted service providers should also be considered an area of risk. As you are responsible for the functions of the FSP, you are also liable for any failures, errors, and non-compliance. An example is the financial and legislative risk for your FSP if you do not have a process in place to notify the Financial Sector Conduct Authority (FSCA) and the FSPs clients when a representative or key individual leaves your employment, which may result in penalties or client complaints.
Managing the risk of the actions or omissions of your staff and any contracted service providers also requires you to constantly consider your business processes, procedures and the agreements in terms of which you operate. Regular monitoring and oversight in these areas, as well as continuously identifying gaps in employees’ knowledge or competence, will significantly decrease these risks.
The risks of estate
With its varied meanings, ‘estate’ can also pose risks. ‘Estate’ may relate to retirement planning, leaving a legacy for dependants, setting up a lucrative business, or running a family practice. Also, consider what will happen to your business after you retire or die. If you plan to provide for dependants through a succession agreement, the risk is that agreements might not be valid or in place. Alternately, your identified successor may not have sufficient operational ability or be incorrectly licenced to carry on your business.
Regardless of what estate means, your FSP will be exposed to risk if your succession plan is not executable. Aspects of estate planning should thus be monitored and reviewed as an area of risk.
Ultimately, risks can only be managed if you are aware of them. By identifying the risks in your ecosystem, you can better understand your business environment and obligations. You can then address gaps or weaknesses to decrease that risk. This may include establishing processes to manage risks and assessing whether these processes are sufficient.
This concludes Part 1 of our two-part series on Risk Management. Keep a look out for Part 2 in our next issue of Mastering Compliance where we look at practical aspects of drafting a risk management plan to manage the risks in your business.
Through our combination of Compliance and Practice Management services, Masthead assists our FSPs to manage their risk by focusing on areas of greatest need within their ecosystem. If you need help in getting started with the process of identifying and understanding the risks specific to your business, attend our Risk Management webinar, or for a more hands-on solution, contact your Masthead Compliance Officer or Regional Office for assistance.