Managing non-financial risk

What is non-financial risk?

Non-financial risk is usually defined by exclusion (what it is not rather than what it is). It is essentially any risk other than the traditional financial risks of market, credit, and liquidity.

In Australia, regulators and financial services business take non-financial risk to mean widely adopted global definitions of the concept. Thanks to APRA definitions also adopted by ASIC, please find below what types of risks fall under this category:

• Operational risk – the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
• Compliance risk – relates to your organisation’s compliance with laws, regulations, rules, related self-regulatory standards, and codes of conduct applicable to its activities
• Conduct risk – relates to how appropriate, ethical or lawful the behaviour of your organisation’s management and employees is.

Examples of other non-financial risks include model risk, strategy risk, and third-party risk, although they could equally be classified as forms of operational risk or conduct risk.

Why care about these risks? Because according to ASIC’s Corporate Governance Taskforce: “The reality is that non-financial risks have very real financial implications for companies, their investors and their customers.”

ASIC’s Corporate Governance Taskforce

The Financial Services Royal Commission highlighted significant concerns with corporate governance practices in many large financial services firms, including those relating to the oversight and management of non-financial risk. ASIC expressed their opinion that “corporate reporting on governance has suffered from a ‘form over substance’ approach, with an emphasis on frameworks and processes rather than actual practices”.

About our course

Managing non-financial risk delves into what non-financial risk is in the context of licensing requirements and why managing it is a good thing for your organisation’s culture and reputation. An essential component of management of non-financial risk is the identification, reduction and mitigation of risks.