Op risk expenditure to shoot up, predicts report

Towergroup cites recent regulatory changes, increased complexity and diversification in financial services firms, and increasingly frequent corporate scandals as motives for financial services companies to adopt more process-orientated enterprise risk management.

The report estimates that 30% of IT spending associated with compliance in the financial services industry consists of wasteful duplication - which TowerGroup said equates to $10 billion globally in IT waste alone - with big companies spread across disparate product lines the worst effected. It further claims that 40% of the $10 billion waste relates to investments in IT, where the benefits that could be spread throughout an organisation are instead implemented in silos, limiting the impact of the system to one product line or geographical unit.

The consultants estimate compliance waste will increase by 25% over the next five years unless financial institutions view regulatory compliance and IT spending on a holistic, enterprise-wide basis. In addition, it said firms should utilise the broad range of technology systems that serve a broader business purpose than merely supporting enterprise risk management.

Financial institutions should welcome Basel II for inspiring an enterprise risk management culture throughout the organisation, said Virginia Garcia, the report’s author. Institutions would be shortsighted to do just enough to meet regulatory requirements, she adds. “There is an urgency to adopt a risk culture that arms firms with the information they need to increase shareholder value.”