The COVID-19 crisis has highlighted that we do not know what tomorrow, or next week or next month will bring. Having a well thought out Risk Management Plan (RMP) will ensure you are better prepared to handle a crisis.
Risk management is part of your job. You help clients think about the future and plan for future events and situations that may arise, many of which are risk events. To what extent have you applied similar risk management techniques in your business?
While planning for internal and external risks is an essential part of owning a business, legislation obliges advisors to implement appropriate risk management processes and procedures.
The law and risk management
In terms of section 11 of the FAIS General Code of Conduct (GCOC), “a provider must at all times have and effectively employ the resources, procedures and appropriate technological systems that can reasonably be expected to eliminate as far as reasonably possible, the risk that clients, product suppliers and other providers or representatives will suffer financial loss through theft, fraud, other dishonest acts, poor administration, negligence, professional misconduct or culpable omissions.”
In addition, the Fit and Proper requirements relating to operational ability require advisors to have effective risk management procedures in place.
To comply with regulation, you need a documented RMP. Failure to keep and maintain an RMP can have serious consequences for your business, as it may result in a penalty, suspension of your licence or even licence withdrawal. In 2012, the Registrar of Financial Services Providers imposed a penalty of R150,000 on an advisor who had, among other things, failed to effectively manage his risks.
Your Risk Management Plan
An RMP needs to address the requirements set out in the GCOC and the Fit and Proper requirements. It must include the processes and procedures to identify, assess, mitigate and manage the specific risks to which your business is exposed. As each advice business is exposed to different risks, your RMP may differ from other advisors’ RMPs.
Key Individuals and staff can jointly identify the risks observed in your business and use this information to complete the RMP. Key Individuals then need to decide how to manage and control them to ensure the business runs smoothly. The risk management process will also assist Key Individuals to focus on areas of the business that need to be improved to reduce the impact of a risk, should it occur.
There are various types of risks to consider. Some may arise from within your business (internal risks), while others stem from external factors or the environment in which your business operates (external risks). Here are some examples of risks that may impact your business:
- Financial risk
Any event that may impact your financial position and involve financial loss may be considered a financial risk. This is a major risk. It could include loss of revenue through theft, fraud, loss of clients or a big client, as well as debt.
As a result of the national lockdown due to the COVID-19 pandemic, many advisors are concerned about the impact of their clients’ financial position on their business. For example, will clients be able to pay their premiums or continue their investment contributions? How will financial markets impact on investment fees earned? Will the business face lapses, cancellations and withdrawals? Advisors who have thought about and developed a plan of action to address such potential financial risks may fare better than others.
In Masthead’s discussions with advisors, those with a diversified client base may be at less risk than those whose clients are concentrated in one segment of the market or who rely on a few clients for most of their income. Advisors who earn ongoing, recurring income or fees may be less affected than advisors who mainly rely on upfront commission. Also, businesses that have put funds aside for a rainy day will have a better chance of weathering the storm.
- Human Resource risks
Any business that employs staff faces certain risks such as human error, poor performance, fraud or loss of key staff members. If a staff member makes an error that results in a client claim or a complaint, you may suffer a financial loss and even lose the client. Fraud committed by an employee may add to your financial burden, while client complaints may affect your reputation. Poor performance and decision making by staff may cause loss of productivity, while loss of knowledgeable staff may result in delays in processing business. This places your clients and business at risk.
With staff working from home during the national lockdown, some of these risks may have been heightened. You will need practical ways to address staff risks. These could include ensuring that PI Cover also covers admin staff, providing relevant training for staff and maintaining an up-to-date operations manual so all employees know what is expected of them. An operations manual will also help new staff members to understand the business processes that must be followed and reduce the time needed to train and upskill people.
- Competitive risk
The actions of new and old competitors could negatively impact your business, resulting in a loss of clients and income. Due to COVID-19, many businesses face new and different challenges. Advisors who adapt quickly and find new ways to do things may present a risk to your business. It is important to know your clients and understand their expectations and what matters to them, so you can implement a plan to address this risk.
- Reputation risk
Bad service delivery to your clients and client complaints may chase away existing and prospective clients. Consider what actions or inactions could adversely impact your reputation and focus on those areas. Be aware of client servicing delays or mistakes and deal promptly with issues where a client’s expectation and their experience are misaligned. This will also help you to identify the cause of the problem, for example insufficient training, and you can take steps to reduce the likelihood of the issue recurring.
- Regulatory and compliance risk
Advisors can only operate if they are appropriately authorised by the Financial Sector Conduct Authority to do so. Failure to adhere to the latest industry regulations or implement remedial actions that your compliance officer identifies, places your licence to operate, and therefore the entire business, at risk.
Identifying key compliance risks and implementing controls and processes to deal with these risks should thus be a priority. By listing all the compliance requirements, assigning responsibility for each and writing down the processes to meet and monitor the requirements, you can cover your bases and remain compliant.
The above risks are just a few of those you should consider. With a good RMP in place, you should not be taken by surprise. You can respond quickly and manage the risks with minimal impact to your business.
Furthermore, if an RMP is properly implemented, you stand a much better chance of operating a business that is free from bad service complaints, civil litigation, theft and fraud. More importantly, your business won’t fail due to licence withdrawal or financial challenges.
There has never been a better time than now to reflect on the effectiveness of your risk management procedures and consider measures to protect your business from future risks that may impact the financial health of your business.
As risk management goes together with business planning, Masthead can assist you to review your business plan. Masthead can also help you identify and address potential risks. This includes implementing a proper financial recovery plan on how to tackle this risk.
In addition, Masthead’s RMP template provides guidance about the types of risks that may affect advisors and can assist with implementing an RMP that is customised for your business. Contact us for assistance – we’d be happy to help.