What is Effective Risk Management?

Guest Author: Jeremy Danon is the principal of Ariel & Associates. Jeremy is a member of our Regulatory Compliance Advisory Group and a contributor to our AFSL Responsible Manager CPD Program.

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Effective risk management is essential for organisations, particularly licensees, to maintain stability, achieve strategic objectives, and comply with legislative and regulatory requirements.

What is risk management?

Risk management involves systematically identifying, analysing, evaluating, treating, monitoring and communicating the risks associated with any activity. This practice enables organisations to minimise losses and maximise opportunities.

Why Risk Management Matters

For both Australian Financial Services (AFS) licensees and APRA regulated entities, implementing risk management systems is a fundamental obligation. And risk assessments are the foundation of AML/CTF Programs.

• The Corporations Act lists the general obligations that the holder of an AFS licence must comply with. Among them is that they must have “adequate risk management systems”. For AFS licensees, ASIC outlines its expectations for a licensee’s risk management system within its Regulatory Guide 104.
• Entities regulated by APRA, such as banks, insurers, and super funds, have specific risk management responsibilities. APRA requires that entities have: “Systems for identifying, measuring, evaluating, monitoring, reporting and controlling or mitigating material risks that may affect its ability or the group it heads, to meet its obligations to depositors and/or policyholders.” APRA’s requirements in relation to risk management frameworks are set out in Prudential Standard CPS 220.

An effective risk management system is also key to enabling sound governance, and supports ethical practice and corporate social responsibility.

Effective risk management systems offer organisations:

• Enhanced resilience due to the ability to withstand unexpected events.
• Improved performance through better decision-making.
• Reduction and prevention of losses which may result from disruptions, accidents and non-compliance with regulatory standards.
• Enhanced organisational reputation and stakeholder trust.

How do you create an effective risk management framework?

Risk management is not about eliminating all risk from an organisation. Some level of risk is inevitable in all business, which means entities need to design a framework that allows them to manage and respond to risks on an ongoing basis.

Effective risk management involves:

• Identifying risks, through processes such as breach reporting, reviewing changes to business processes or systems, reviewing legal or regulatory changes, and strategic planning.
• Assessing or analysing risks, based on the potential consequences and likelihood of the risk occurring.
• Evaluating risks that require treatment and the prioritisation of these treatments.
• Undertaking treatment of prioritised risks, such as accepting the risk, strengthening the existing controls, transferring the risk, or avoiding the risk by not undertaking the activity.
• Ongoing monitoring, management and review to minimise the likelihood or impact of unforeseen events.

In addition, the framework must be supported by clear controls and processes, good governance, sound culture, fit for purpose communication, training, and support for people.

How do you implement your risk management framework?

A crucial step in establishing your risk management framework is communicating it to the organisation. The objective of a licensee’s communications strategy should be to embed risk management within the culture of the organisation, thereby ensuring that all stakeholders understand the importance of risk management and the adherence to its policies and procedures.

Risk culture is not separate to organisational culture. The way risks are managed (or not) and the attitude towards risk exhibited by senior leaders influences how all employees and stakeholders behave. Therefore, it is vital that a positive risk culture is established across all levels of the organisation.

• Ongoing training. While it is essential that all employees receive appropriate risk management training as part of their induction process, training should be ongoing to ensure that a risk management culture is instilled within the organisation. Training should focus on the company’s risk management procedures in conjunction with compliance processes.
• Consider the context. Employees will be more receptive to the risk culture if they have an understanding of the ‘why’ as well as the ‘what’ and ‘how’. Messaging needs to be linked to the importance of the reputation of the individual, organisation, and broader financial markets.
• Participation in planning. When creating the risk management framework, look to all areas of the business for input. By involving multiple stakeholders in compliance planning, you can create advocates within each team.

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Our training solutions are designed to support all levels of expertise within your organisation. Explore our training covering Risk Management. Learn More.

AML/CTF Risk Awareness Training: With AML/CTF reforms taking effect from 2026, this brings opportunity to proactively examine the soundness of your teams’ AML-specific and general risk management capability and accountability.

AFSL Responsible Manager CPD: An essential annual update for Responsible Managers and Governance, Risk and Compliance Leaders. Topic 2: Meeting your risk management systems obligations

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