The risk landscape for financial services in 2023

We, BDO, recently published the eighth edition of the Global Risk Landscape Report. The report is based on a global survey of 500 C-suite executives. The report examines both developments in risk management and specific risks faced by businesses around the world. The report has a number of findings and insights that will be of interest to financial services businesses. In this article, I outline those key points. I would also encourage you to explore the data using our data visualisation tool below and to download and read the full report.

The risk multiplier effect

The ‘big idea’ to emerge from the report is the “risk multiplier effect”. This represents a paradigm shift for risk management; it describes the way different risks intersect and amplify each other. The risk multiplier effect means businesses are facing more existential risks than before. Business leaders are being challenged to focus on mitigating inevitable risk combinations that can threaten their businesses rather than adopt a simply preventative approach.

84% of respondents from the financial services sector agreed that risks are becoming increasingly interconnected and complex. Additionally, 96% of respondents from the sector believe that the global risk landscape is characterised more by the relationships between risks than by the risks themselves.

 

“This is good news. The first step to addressing new and different risks is to identify and understand them. I am not surprised the financial services businesses understand the potential impact of the “risk multiplier effect” given how important having a proactive attitude to risk in general is for FS businesses.”

Richard Barnwell, Partner, Financial Services.

Ultimate risk multipliers

Ultimate risk multipliers are the connected risk pairings, or even triple and quadruple threats, which intersect and amplify each other to become potentially existential. Even in a risk-welcoming environment, risks need to be mitigated before they become existential threats.

Business interruption × capital/funding was ranked by respondents as the most powerful risk combination for the financial services sector. This is no surprise. Financial services businesses will be aware of the potential impact of the various global financial and banking crises. An enforced pause in business operations combined with a collapse in lending and investment could be fatal for financial services businesses.

I believe businesses in FS and need to be aware of the most common risk multipliers and dangerous risk pairs affecting them so that they can develop the right strategies to protect themselves from financial, environmental, reputational and workforce damage.

Chaos as a ladder

Proactive, risk-welcoming management teams are better able to manage and mitigate risk multipliers, and crucially turn risks into opportunities. Our research discovered that companies with a risk officer in the C-Suite are 7.25 times more likely to be risk-welcoming and 2.1 times more likely to take a proactive approach to risk than those without one. This approach involves proactive planning and embracing the opportunities that can arise from chaos.

Industry is a driving factor of whether a company employs senior risk officers. Our research found that in financial services, 82% of respondents say their organisation had a C-suite Chief Risk Officer (CRO) or similar. The remaining respondents are considering adding a CRO to the C-suite. –Forty four percent of respondents from financial services claimed they are very proactive in dealing with risk.

However, only 18% of business leaders from this sector told us that they would categorise their level of risk appetite as risk welcoming. This is perhaps to be expected for sector so heavily regulated.