Op risk still at an early stage, says FSA

Operational risk remains at an early stage of development compared with other areas of risk management, a review by the Financial Services Authority (FSA), the UK regulator, has found.

However, while there are many areas that still require attention, firms have made significant progress in developing practices to manage operational risk, the FSA said. This is partly driven by an increased emphasis on senior management accountability and regulatory process, the regulator said, adding that some firms have taken a 'wait and see' approach because of a lack of knowledge over what good practice might constitute and uncertainties over regulatory requirements.

“Operational risk remains at an early stage of development, and although some firms have made substantial progress, many still need to think carefully about how to prepare for the FSA's new approach," said Clive Briault, director of prudential standards at the FSA.

Firms more advanced in their approach to operational risk management demonstrated established senior management commitment with a clear internal focus for operational risk, said the FSA. These firms integrated operational risk decisions into the business framework and used 'building-block' learning to enhance their approach.

The FSA released the review of operational risk management practices to help firms develop their own op risk programmes. The review gives feedback on industry practice from 22 UK financial firms as they prepare for the FSA’s new guidelines for operational risk management.

Firms will need to comply with the regulator's policy on systems and controls when they are introduced in September 2004. A draft framework issued in July 2002 covered high-level controls for operational risk, and a final policy is due to be published in September 2003.