RSK4802 EXAM PACK 2023

RSK4802 QUESTIONS AND ANSWERS REVISION STUDY PACK lOMoARcPSD| QUESTION1 QUESTION2 With the aid of a diagram, identify the 5 steps in the Risk Management process. Discuss the NB9s of each steps in the context of any organization of choice. 1. Identify potential risks What can possibly go wrong? The four main risk categories of risk are hazard risks, such as fires or injuries; operational risks, including turnover and supplier failure; financial risks, such as economic recession; and strategic risks, which include new competitors and brand reputation. Being able to identify what types of risk you have is vital to the risk management process. An organization can identify their risks through experience and internal history, consulting with industry professionals, and external research. They may also try interviews or group brainstorming, as discussed in this Project Manager article 8 New Ways to Identify Risks. It9s important to remember that the risk environment is always changing, so this step should be revisited regularly. 2. Measure frequency and severity What is the likelihood of a risk occurring and if it did, what would be the impact? lOMoARcPSD| Many organizations use a heat map to measure their risks on this scale. A risk map is a visual tool that details which risks are frequent and which are severe (and thus require the most resources). This will help you identify which are very unlikely or would have low impact, and which are very likely and would have a significant impact. Knowing the frequency and severity of your risks will show you where to spend your time and money, and allow your team to prioritize their resources. More details on risk maps can be found in our blog posts on the topic: The Importance of Risk Mapping and How to Build a Risk Map. 3. Examine alternative solutions What are the potential ways to treat the risk and of these, which strikes the best balance between being affordable and effective? Organizations usually have the options to accept, avoid, control, or transfer a risk. Accepting the risk means deciding that some risks are inherent in doing business and that the benefits of an activity outweigh the potential risks. To avoid a risk, the organization simply has to not participate in that activity. Risk control involves prevention (reducing the likelihood that the risk will occur) or mitigation, which is reducing the impact it will have if it does occur. Risk transfer involves giving responsibility for any negative outcomes to another party, as is the case when an organization purchases insurance. 4. Decide which solution to use and implement it Once all reasonable potential solutions are listed, pick the one that is most likely to achieve desired outcomes. lOMoARcPSD| Find the needed resources, such as personnel and funding, and get the necessary buy-in. Senior management will likely have to approve the plan, and team members will have to be informed and trained if necessary. Set up a formal process to implement the solution logically and consistently across the organization, and encourage employees every step of the way. 5. Monitor results Risk management is a process, not a project that can be <finished= and then forgotten about. The organization, its environment, and its risks are constantly changing, so the process should be consistently revisited. Determine whether the initiatives are effective and whether changes or updates are required. Sometimes, the team may have to start over with a new process if the implemented strategy is not effective. If an organization gradually formalizes its risk management process and develops a risk culture, it will become more resilient and adaptable in the face of change. This will also mean making more informed decisions based on a complete picture of the organi zation9s operating environment and creating a stronger bottom line over the long-term. Clear Risk's cloud-based Claims, Incident, and Risk management system allows organizations to better control their risk management activities. OUESTION 3 Boards for banks are made up of members that represent different interest groups and these tend to influence the risk appetite for banks Discuss the main concerns and interest of the following groups (debt holders, shareholders, regulators and government) and how they may influence risk appetite for banks lOMoARcPSD| Risk appetite represents the decision of how much an organisation is willing to assume consistently with its strategy. Each business strategy implies some amount of risk, in terms of uncertainty of the results that will be achieved. It must be measurable Boards had to be clear about the strategy and risk appetite of the company and to respond in a timely manner, requiring efficient reporting systems. They also needed to oversee risk management and remuneration systems compatible with their objectives and risk appetite. One major problem that led to the recent financial crisis was that although objectives had been created, there was no articulation of risk appetite or identification of those responsible when risks were incurred. There are differ groups to consider when dealing with risk appetite: a. Debt holders The debt holders are those that provide the bank with funding and are mainly interested in the solvency of the bank that is capacity to fully and in a timely manner keep all the bank9s obligations. For example that is the depositors, banks and the bondholders all of them provide the bank with funding in different ways. The bond holders always pay more interest rate to the banks. b. Shareholders Shareholders profit is defined in a residual way, that is, what is left from the bank income after all the other stakeholders have been paid back could also mean suffering a loss. Therefore, shareholders are interested mainly in the bank9s profitabili ty and its variability overtime because their decision-making criteria are if the banks expected profits are adequate in comparison to the carried risks. Consequently, shareholders9 concerns about the risk appetite are represented by the earning variability and its drivers. c. Regulators and supervisors Regulators and supervisors They play a key role in the financial markets and strongly impact the behaviour of different players. Concerning the risk appetite, several regulatory elements shape it heavily in terms of tools and amounts. This includes the Basel Accord, where regulators set out the key metrics for assessing banks 8risks, capital and capital adequacy. Such influences have been strengthened in the forthcoming innovations to the regulatory framework Basel III, where compulsory metrics are introduced not only with regard to capital adequacy but also concerning liquidity. Supervisors use lOMoARcPSD| metrics in assessing the banks. And they pay more attention to the bank9s decision-making process and the outcome in terms of the actual risk profile. In which that supervisors are not only interested in mere solvability but also in medium-term business sustainability and therefore have a perspective that exceeds the debt holders. d. Governments Government as one the key component of banks, are the keener on keeping banks from suffering large losses or being able to withstand the losses to avoid additional burden for the taxpayers. For instance, the Volcker Rule could be seen as a pre-emptive measure to prevent banks from assuming too much risk. Therefore, banks decision on risk appetite cannot be not complaint with government expectations. State interventions extended deposit guarantee schemes and supported banks via loans, with actual lending or guarantees offered, or by security repurchase agreements, massive bond-purchase programs and huge recapitalizations. Sometimes, governments often became banks9 shareholders and thus they could substantially set the risk appetite while in other cases they negotiated covenants and action plans as a condition of rescue packages, which could materially impact risk appetite, for instance, leading to disposing of or shutting down some business lines deemed too risky. Conclusion All banks cannot survive without the four components; it runs it business depending on those key components that are the debt holders, depositors, bond holders and, the banks, Shareholders, the government and, the regulators and supervisors. lOMoARcPSD| QUESTION4 The Financial and Intermediary Act places a lot of importance on the Compliance Officer position within the structures of the FSP, according to the Act, a Compliance Officer has to be 8Fit and proper 8Discuss the 5 fit and proper requirements under the Act and explain the importance of these requirements in the context of risk management Fit & Proper for a Representative Personal character qualities of honesty and integrity a) Must not have been Found guilty by: b)Court of law c)Professional or financial service industry body d)Regulatory or supervisory body e)License refused, suspended or withdrawn f)Refused admission to statutory professional body g) Disqualifiedrom taking part in management of any company Irrespective if labeled Importance in the context of Risk management. It is important for such an individual to be reliable and have integrity as they may be entrusted with organizational resources or sensitive information Competency: a) Candidate must have general experience in the relevant field and specific experience as it relates to their role. lOMoARcPSD| b) Qualifications: Qualifications must be relevant to the industry and must comply with the cut off dates according to date of appointment. c) Regulatory examinations: Level 1 FAIS/FICA – no exemptions, Level 2 Product specific Importance in the context of Risk management. It is important for such an individual to be competent as the individual will also be expected to conduct training for other staff as part of his/her role Continuous Professional Development a)The candidate needs to continuously develop his/herself to keep abreast of changes that may take place within the industry. This takes the forms of both examinations, attending workshops and on the job training b)15-60 credits over 3 year period Importance in the context of Risk management. It is important for such an individual to continuously develop him/herself as there are new risks that the organization faces as the environment changes Operational Ability Although operational ability is not a direct responsibility of the compliance officer, he/she must operate in a setup that allows him/her to effectively perform his/her duties. It is therefore expected of the compliance to know the infrastructure setup required and to make such recommendations to the Financial Services Provider Not be unrehabilitated and insolvent The Compliance officer must be a person of high integrity in terms of how he/she handles their finances. To that effect the compliance office must not be a person who is unrehabilitated and or is insolvent Importance in the context of Risk management. It is important for such an individual not to be un rehabilitated and insolvent and such individuals will be holding a position of trust which may result in reputational risk should clients get to know the incumbent9s circumstances. lOMoARcPSD| Question1 Define the concept <Governance, Risk Management and Compliance= (GRC) and discuss the benefits of this approach to companies. Under King 3 report: 1) Issues of Good corporate governance which include a) Good ethical practices, b)Issues of disclosure of material issues, c)Importance of board subcommittees specifically on risk management, remunerations, ethics and good corporate governance A lack of good and strong corporate governance can lead to a banking crisis √ that in turn can be the catalyst for what can ultimately be an economic recession. √ Sound corporate governance considers the interests of all stakeholders including depositors and others whose interest may not always be factored. Therefore, banking regulators must determine that individual banks are conducting their business in a way that benefits all stakeholders9 not just shareholders. Should there not be effective and strong governance lead by the Board down, the business units will tend to regulate risk to achieve their own required levels as a profit center whilst not appreciating the downside to the organization as the look towards short term results, inadequate corporate governance stops the board from supervising down to those units. This leads to inadequate internal control by the internal audit department of the group with little or no external supervision of the group. The structure becomes non-transparent, which in turn leads to no responsibility been taken or oblique responsibility at best. Good strong corporate governance brings about stability and the successful functioning of the financial system. it promotes the taking of appropriate risk and the pricing of that risk. This greases the financial engine and fuels the economy. Leverage is a required catalyst for business and thus the livelihood of the general average person. Bad governance and the failure of those <too big to fail= impacts on the lives of everyone. However, more importantly, the contrary is also true, good governance of the banking sector instills confidence to lend and to borrow, prices these functions appropriately and thus fuels growth, which lOMoARcPSD| is so important for employment, and hence the social benefits that this brings to the wellbeing of humankind. Question 1 You act as a consultant on corporate governance matters and have recently received the following enquiries: Enquiry 1 The 4 executive directors of a mining company have to visit new prospects in Africa due to logistical problems they will have to travel together on certain routes in view of fierce completion on the market, this strategic trip will not be publicized. Risk disclosure The board should ensure that there are processes in place allowing complete, timely, relevant, accurate and accessible risk disclosure to stakeholders. In its statement in the integrated report, the board should disclose for the period under review any undue, unexpected or unusual risks it has taken in the pursuit of reward as well as any material losses and the causes of the losses. This disclosure should be made with due regard to the company9s commercially privileged information. In disclosing material losses, the board should endeavor to quantify and disclose the impact that these losses have on the company and the responses and interventions implemented by the board and management to prevent recurrence of the losses. The board should disclose any current, imminent or envisaged risk that may threaten the long-term sustainability of the company. The board should also disclose its views on the effectiveness of the company9s risk management processes in the integrated report. Executive director involvement in the day-to-day management of the company or being in the fulltime salaried employment of the company, or both defines the director as executive. Executive directors should carefully manage the conflict btw their management responsibilities and their fiduciary duties as directors in the best interest of the company. lOMoARcPSD| Enquiry 2 Mr. Lincoln act as an executive chairperson of his company and sits on the remuneration committee Lincoln is a shareholder in the company, his son acts as the CEO of the company, which is listed on the JSE, the enquiry was received from a minority shareholder. With regard to the chairman serving on other committees The chairman should not be a member of the audit committee; The chairman should not chair the remuneration committee but may be a member of it; The chairman should be a member of the nomination committee and may also be its chairman; The chairman should not chair the risk committee but may be a member of it; There should be a successive plan for the position of the chairman. Committees Audit, risk, nomination and remuneration committees should be established The Companies Act also requires a social and ethics committee and King3 principles should also apply. Board committees should have: • Terms of Reference approved by the board that are reviewed annually • Composition and terms of reference should be disclosed in the integrated report • Composition should comprise a majority of non-executive directors of which the majority should be independent (risk-committee may have a mixed composition) • The chairman should not participate in incentive schemes, benchmarks used, retention schemes, justification for salaries above from medians, material ex-grata payments, executive employment policies and max potential dilution from incentive awards. • Shareholders should vote a non- binding vote on the company9s remuneration policy • The board should determine executive directors9 remuneration in accordance with the policy put to shareholders Enquiry 3 The company has awarded shares and options on shares to its non-executive directors the option prices are well below market prices Remuneration disclosure and shareholders Votes lOMoARcPSD| King3 requires disclosure of the remuneration of each individual director and senior executives. Guidance is given on remuneration and policy and practices, incl that non-executives should not receive share options. King3 recommends that remuneration policies be put to the shareholders for a non-binding advisory vote and the board should determine the remuneration of the executive directors in line with policy. Share-based and other long-term incentive schemes The remuneration committee should regularly review incentive schemes to ensure their continued contribution to shareholder value. The committee should guide against unjustified windfalls and in appropriate gains from the operation share-based incentive. Participation in the share incentive schemes should be restricted to employees and directors and should have appropriate limits for individual participation, which should be disclosed. All share-based incentives, incl options and restricted or conditional shares, whether settled in cash or in shares, should align the interests of executives with those of shareholders and should link reward to performance over the long term. Consistency in granting of share incentive awards and options, generally yearly, is desirable as it reduces the risk of unanticipated outcomes that arise out of share price volatility and cyclical factor, allows the underwater options or excessive windfall gains, the price at which shares are issued under a scheme should not be less than the mid-market price or volume weighted average price immediately preceding the grant of the shares under the scheme. Enquiry 4 Mr. Clinton is a non-executive director of the company and attends the monthly management tender committee meetings, a newspaper reported that Mr. Clinton did not recuse himself from a meeting which awarded a major contract to his niece. Conflict of interest Managing conflict of interest It is not sufficient merely to table a register of interests. All interest and external legal requirements must be met. The chairman must as affected directors to recuse themselves from discussions and decisions in which they have a conflict, unless they are requested to provide specific input,in which event they should not be party to the decision. lOMoARcPSD| Question 2 The organization for economic Co-operation and Development (OECD) published the following docum ent in a document in June 8Corporate Governance and the Financial Crisis Key findings and Main Messages9.Analyse the four areas immediately linked to the global financial crisis of 2008/2009 a)Corporate governance weaknesses in remuneration • The governance of remuneration/incentive systems has often failed because negotiations and decisions are not carried out at arm9s length. Managers and others have had too much influence over the level and conditions for performance-based remuneration with boards unable or incapable of exercising objective, independent judgement. • In many cases it is striking how the link between performance and remuneration is very weak or difficult to establish. The use of company stock price as a single measure for example, does not allow to benchmark firm specific performance against an industry or market average • Remuneration schemes are often overly complicated or obscure in ways that camouflage conditions and consequences. They also tend to be asymmetric with limited downside risk thereby encouraging excessive risk taking • Transparency needs to be improved beyond disclosure. Corporations should be able to explain the main characteristics of their performance related remuneration programs in concise and non-technical terms. This should include the total cost of the program; performance criteria and; how the remuneration is adjusted for related risks. • The goal needs to be remuneration/incentive systems that encourage long term performance and this will require instruments to reward executives once the performance has been realized • Steps must be taken to ensure that remuneration is established through an explicit governance process where the roles and responsibilities of those involved, including consultants, and risk managers, are clearly defined and separated. It should be considered good practice to give a significant role to non-executive independent board members in the process. lOMoARcPSD| • In order to increase awareness and attention, it should be considered good practice that remuneration policies are submitted to the annual meeting and as appropriate subject to shareholder approval. Risk management • Perhaps one of the greatest shocks from the financial crisis has been the widespread failure of risk management. In many cases risk was not managed on an enterprise basis and not adjusted to corporate strategy. Risk managers were often kept separate from management and not regarded as an essentia l part of implementing the company9s strategy. Most important of all, boards were in a number of cases ignorant of the risk facing the company. • Both financial and non-financial companies face a similar range of risks that need to be managed including operational, strategic and market risks. However, for financial companies the volatility of risk tends to be greater requiring even more efforts by them to manage risks. Unique for banks is liquidity risk since they are involved in borrowing short and lending long (maturity transformation) and the systemic risk that this entails forms the basis for a great deal of prudential oversight. • It should be fully understood by regulators and other standard setters that effective risk management is not about eliminating risk-taking, which is a fundamental driving force in business and entrepreneurship. The aim is to ensure that risks are understood, managed and, when appropriate, communicated. • Effective implementation of risk management requires an enterprise-wide approach rather than treating each business unit individually. It should be considered good practice to involve the Board in both establishing and overseeing the risk management structure. • The board should also review and provide guidance about the alignment of corporate strategy with risk-appetite and the internal risk management structure. • To assist the board in its work, it should also be considered good practice that risk management a nd control functions be independent of profit centres and the <chief risk officer= or equivalent should report directly to the Board of Directors along the lines already advocated in the OECD Principles for internal control functions reporting to the audit committee or equivalent. lOMoARcPSD| • The process of risk management and the results of risk assessments should be appropriately disclosed. Without revealing any trade secrets, the board should make sure that the firm communicates to the market material risk factors in a transparent and understandable fashion. Disclosure of risk factors should be focused on those identified as more relevant and/or should rank material risk factors in order of importance on the basis of a qualitative selection whose criteria should also be disclosed. • With few exceptions, risk management is typically not covered, or is insufficiently covered, by existing corporate governance standards or codes. Corporate governance standard setters should be encouraged to include or improve references to risk management in order to raise awareness and improve implementation. Board practices • It appears difficult and perhaps impossible to find a <silver bullet= in the form of laws and regulations to improve board performance. This leaves the private sector with an important responsibility to improve board practices through, inter alia, implementing voluntary standards. • The objective should be to facilitate the creation of competent boards that are capable of objective and independent judgement. While there is no inherent conflict between independence and competence, it is important to keep in mind that formal independence should sometimes be a necessary, but never a sufficient, condition for board membership. A board evaluation process, conducted with the support of independent experts on a regular basis, should be used as a structural tool for monitoring board effectiveness and efficiency. • The shareholders9 role in nominating board members and in their appointment should be enhanced through instruments which take into account the specific features of the ownership structure of a company. • It should also be considered good practice that the functions of Chief Executive Officer and Chair of the Board of Directors in unitary boards are separated. When a dual board structure exists, the head of the management board should not become chair of the supervisory board upon retirement. In both cases, some form of <comply or explain= and associated transparency is necessary to preserve flexibility for companies in special situations. lOMoARcPSD| • Board member liability and how their duties are specified and disclosed should remain on the policy agenda since it is not clear that effective arrangements are yet in place. • It should be considered good practice that boards develop specific policy for the identification of the best skill composition of the board, possibly indicating the professional qualities whose presence may favour an effective board. Especially in banks, some form of continuing training is required. • In companies and industries where <fit and proper person tests= are applied by regulators for public policy reasons, so that board membership is not solely a shareholder decision, the criteria could be extended to technical and professional competence of potential members, including general governance and risk management skills. • The test for those particular companies might also consider the independence and objectivity of boards. To meet concerns about board independence, the test might also consider the time that board members have served under the same CEO or Chair The exercise of shareholders rights • The interests of some shareholders and those of management have been <aligned= in the past period of a bull market but this was not sustainable and was associated with a great deal of short-term behaviour. • While there are different types of shareholders, they have tended to be reactive rather than proactive and seldom challenge boards in sufficient number to make a difference. • Companies need to do more – and it is in their interests- to support constructive engagement with their shareholders. • The equity share of institutional investors continues to increase but their voting behaviour suggests that they can have important conflicts of interest. Many institutional investors are still not playing an active, informed role and when compelled to vote, the reaction often appears to be mechanical. • Institutional investors (and others) should not be discouraged from acting together in individual shareholders meetings, both through consultation before the meeting and the presentation of common proposals, provided that they do not intend to obtain the control of the company. lOMoARcPSD| • Even though barriers to voting ( e.g. , share blocking) do not fully explain low voting participation, they are still significant, namely with regards to cross-borders voting. Measures should be taken, both by regulators and by all the institutions involved in the voting chain (issuers, custodians, etc) to remove remaining obstacles and to encourage the use of flexible voting mechanisms such as electronic voting. As the importance of institutional shareholders increases, greater attention needs to be given to proxy advisors and to the potential for conflicts of interest. It is also claimed that there is a danger of <one size fits all= voting advice so that a competitive market for advice needs to be encouraged. b)<It is crucial that banks have strong corporate governance=. Evaluate this statement and provide reasons for your view. Financial institutions, particularly banks are a critical component of any economy. They provide financing for commercial enterprises, basic financial services to the population at large and provide access to payment systems. The importance of banks to national economies is demonstrated by the fact that banking is virtually universally a regulated industry and that banks have some recourse to government particularly through the Central banks. It is therefore of crucial importance that banks maintain strong corporate governance.