Becoming operationally resilient - the imperatives: Part 2 - the commercial imperative
04 June 2019
In part 1 of this blog we unpicked the business plans for 2019/20 for the FCA and PRA insofar as they relate to operational resilience. The main message we would take from the FCA plans, which reveal the most detail, is that the regulator has a wide programme of supervisory activities based on existing regulation, before it factors in the work on any new policy statement.
While we hear of pockets of the industry who are waiting for the draft policy statement before taking further action, we have conversations with firms on a weekly basis who are determined to get on the front foot. What we have heard from the regulator is that there was an unprecedented response to the 2018 discussion paper with a positive sentiment in the direction of travel. It is therefore right for firms to be acting now, not least because the concepts in the discussion paper are likely to carry forward into policy development. But the other reason to take action now is because, frankly, it makes good commercial sense.
We caution firms not to be distracted from the business imperatives of improving resilience in favour of simply doing enough to satisfy the regulators. Regulation of this topic should set a baseline level of expectations and standards. However, in almost all cases, firms should seek a higher standard for themselves and their customers, particularly as robust operational resilience could prove to be a key differentiator.
Let’s just remind ourselves about what the new perspective of operational resilience brings with it. Firstly, it moves firms into thinking through a customer lens through defining the business services which they provide. Secondly, it aligns MI (metrics and impact tolerances) to business services with oversight up to board level. Thirdly, it requires the use of stress-testing with some plausible but severe scenarios to validate impact tolerances and test the appropriate response.
So what are the benefits of becoming operationally resilient? In 2018 PwC published a guide to operational resilience in which we talk about the benefits of increased operational resilience and these remain true today. From a commercial perspective these include being more agile to take advantage of new market opportunities in a controlled manner, and building customer trust that can lead to greater loyalty and brand promotion.
We see higher levels of resilience at firms that are culturally comfortable with the notion that things will go wrong and which then take responsibility to ensure that such incidents don’t result in disruption to business services. Setting the right culture plays a key role in enhancing resilience. This starts with the CEO and the executive team in setting the right example.
Firms also need to be vigilant about future changes to their sectors. Through PwC’s new disruption campaign we are working with firms to consider how they prepare themselves to meet changing customer demand, as customer appetite and their trust in firms is met with the right enablers to disrupt the market. For firms to capitalise on these shifting market dynamics and generate long-term sustainable value they must consider resilience in how they innovate; from decisions to invest, through design, development and testing and at hand-off into business-as-usual.
This all sounds well and good, but isn’t it rather expensive to fix? Where firms identify weaknesses in their control frameworks which require investment then of course there will always be a cost / benefit trade-off to consider. While there are incremental costs in becoming resilient, there are commercial benefits we’ve outlined above. History also shows that significant operational incidents are costly. Ultimately, we see investment in operational resilience as small in the context of historic costs to address financial resilience or conduct failures.
So while the regulatory perspective remains an important lens to consider, we encourage firms to start thinking about their own resilience, and how actions they could take now may lessen any impact on the customers they serve. After all, it makes good commercial sense.