Financial Markets Stability Board Publishes Review of the “3 lines” Risk Management Framework
The Financial Markets Stability Board (FMSB) has published a review into the 3 lines of defence which has long underpinned the risk management policies of financial services firms. Within their review, the FMSB found that staff across the business may not understand how the three lines interact, which may lead to a fragmentation of responsibilities and a reduction in the accountability at firms. The review found that whilst firms often design high quality risk management frameworks (including accompanying policies and procedures), these are often undermined by poor culture and a lack of collaboration across the three lines. In addition to these overarching comments the FMSB has also published a Risk Register which can be used by firms as guidance when assessing their potential responses to business risks.
The 3 lines risk management framework has been consistently adopted across the financial services industry as a way of apportioning responsibilities for management of risks facing firms. The first line of defence are those responsible for the provision of products and services to clients, with responsibility for day-to-day managing of business risks. The second line of defence includes support functions, whose role is to provide specialise expertise, challenge and oversee the first line. The third line of defence provides independent assurance, usually taking the form of an audit function. In order to maintain a successful risk management framework, firms must ensure that all lines are aligned with respect to the risk appetite, culture and reporting requirements. Firms should continually evaluate the effectiveness of the three lines in their business, ensuring that it is appropriate to dynamically respond to emerging risks.
