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Reputational risk is the biggest concern for UK asset management chief risk officers (CROs) followed by the hostile regulatory environment and greater client scrutiny, according to new research published today by Ernst & Young. But CROs are finding that they are not being given the information they need to adequately advise and protect their business nor are they being included in business processes, according to the poll of 23 CROs from some of the largest asset management firms in the UK.

Over a third of respondents can launch a new product from idea in up to eight weeks, while it takes 22% between three to six months. However, only 30% of the CROs thought that the process for pricing new risks into the product was adequate, compared to 48% who didn’t.

Dr Anthony Kirby, director in the Ernst & Young regulatory and risk management practice, comments: “Asset management firms are facing increasingly severe risks as the recession continues. Failing to get CROs involved in new product development or the strategic direction process could result further down the line in disgruntled clients and investors or worse. CROs play a hugely important element in ‘fine-tuning’ products. Their role is really business critical in the current environment.”

Model variations but drive to improve reporting

With market, liquidity and valuation at the top of the agenda for most firms, the report finds a wide variation in ex-ante risk modeling. While the vast majority of those polled undertake such modeling, 26% said they didn’t and 9% didn’t know.

Bond pricing and same-day valuations are also a concern: more than half of the CROs polled said they have had problems with third party valuations and several were unhappy with administrators’ increasing reliance in fund managers.

On the positive side, most firms are now undertaking more frequent counterparty risk assessments and many are trying to centralize counterparty limit setting. The research found that many risk managers are moving beyond conventional credit ratings, instead using credit default swap prices to gauge risk.

Anthony explains: “Historically, risk governance has been split between corporate and operational risks on the one hand, and investment risks on the other. The absence of a comprehensive risk governance structure – and the weakness of information flow between these traditional silos – is leading to gaps and a lack of accountability over certain risk areas such as liquidity, product and counterparty risk.”

Many firms are finding that their current systems are unable to aggregate or break down credit exposure by counterparty and product: just 13% of respondents could do both, 35% counterparty only and 4% product only.

Anthony comments: “Firms that can do both well rather than adequately could quite possibly steal a march on their rivals in the current environment. It is telling that just three of the 23 firms we polled were able to break down their risk exposures by counterparty and product on the same day on15 September last year. It may be challenging to devise comprehensive risk governance structures, but developing the necessary skills and data systems to keep on top of all potential risks should be front of mind for CROs.”

Hurdles to jump

Respondents identified a number of barriers that need to be overcome before real improvements can be made in risk management. These include:

• Insufficient clarity from regulators, with conflicting legal consequences locally against those regionally and globally;

• Lack of suitable, qualified staff who can communicate with fund managers, the sales & marketing teams and control functions;

• Lack of maturity in data models, reliable historic data and the difficulty in collecting accurate new data; and

• Cultural issues within funds, which includes lack of management support.

Ernst & Young EMEIA
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Ernst & Young Europe, Middle East, India and Africa has over 65, 000 people in 87 countries and a turnover of $11.4 billion.

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