Cash Flows, Transactions, and Customer Experiences: A Guide to Managing Risk and Controls
As financial institutions navigate an increasingly complex landscape, effective risk management and control activities have become crucial for maintaining stability and trust with customers.
Control Activities: The First Line of Defense
Entities must establish control activities that are designed to mitigate material risks related to their objectives. These activities should be defined at every business level and monitored regularly to ensure they remain effective.
Key Control Activities
- Establishing a control structure with defined policies and procedures
- Implementing physical controls, such as dual custody and reconciliations
- Monitoring compliance with risk exposure limits and following up on non-compliance
- Authorizing transactions over certain limits
- Verifying and reconciling transaction details, risk management models, and cash flows
Segregation of Duties: Reducing Risk and Error
Segregating duties is essential for reducing the risk of errors, fraud, and misappropriation of assets. This can be achieved by dividing responsibility for approving transactions, recording transactions, and handling related assets.
Information and Communication: The Key to Effective Controls
Entities must use reliable financial, operational, compliance, and external market information to support internal controls. This includes:
- Implementing secure and monitored information systems
- Maintaining controls over computer systems
- Developing business resumption and contingency plans
- Periodically testing contingency plans
Monitoring Activities and Correcting Deficiencies
Entities must implement processes for monitoring internal controls, including daily monitoring and periodic evaluations.
Internal Audit: A Critical Component of Risk Management
Entities should ensure that an audit of the control system is carried out by operationally independent and competent staff. The internal audit function should report to the governing body or its audit committee and provide an independent assessment of the adequacy of and compliance with established policies.
Identifying and Correcting Deficiencies
Entities must identify deficiencies in their control systems and report them for correction. Senior management should establish a system to track rectification, and the internal audit function should conduct monitoring and inform senior management of any uncorrected deficiencies.
Specific Requirements for Trust Companies, Company Managers, and Corporate Services Providers
Entities providing trust company services, company management services, or corporate services must comply with specific requirements, including:
- Segregating client assets
- Holding client money in clearly segregated accounts
- Providing written disclosure to clients regarding the terms on which their money is held
Additional Requirements for Securities Investment Business Service Providers
Entities providing securities investment business services must implement policies to minimize conflicts of interest and ensure fair treatment of clients. This includes:
- Implementing review processes to prevent and detect errors, omissions, fraud, and other improper activity
- Segregating client funds and property
By implementing robust control activities, segregating duties, and monitoring internal controls, financial institutions can reduce risk, maintain compliance with regulatory requirements, and build trust with customers.