92% of firms took “some form of action” to assess the impact of the pandemic, reveals KPMG survey
Investment firms boosted their risk controls over 2020 as a result of the coronavirus pandemic, with additional stress testing and monitoring put in place in response to the crisis, according to a KPMG survey.
KPMG’s sixth annual survey of risk and Internal Capital Adequacy Assessment Process (ICAAP) benchmarking, which covered 40 investment management firms of varying size, revealed that 92% of firms took “some form of action” to assess the impact of the pandemic.
Additional stress testing was undertaken by 65% of firms, while 40% said they increased their level of monitoring over financial and liquid resources.
Just over a quarter of firms (28%) saw an increase in operational risks events, with 15% reporting an increase in the size of operational losses.
KPMG said the crisis has “changed the risk profiles of firms”, leading to 28% of respondents holding more capital and 58% re-assessing inputs to operational risk scenarios included in the ICAAP.
The survey also found that the gap between firms’ own assessment of their capital requirements and that of the Financial Conduct Authority (FCA) has narrowed, with the median difference now standing at 22% compared to 28% last year.
It was the first time in the survey’s history when there were no instances where the FCA assessed a firm’s requirement to be more than double the firm’s own assessment, which had been the case for 12% of respondents in 2019.
KPMG said this change could be attributed to the fact that approaches to risk assessment are improving but also noted that this could be because of a “notable drop” in firms receiving supervisory review and evaluation process feedback from the FCA due to the pandemic.
Partner at KPMG in the UK David Yim added: The challenges over recent months could be characterised as a real life ‘stress test’ and have impacted every area of business. Like every other industry, investment managers have adapted to new ways of working; and it is a testament to the industry that most firms have demonstrated operational and, to date, financial resilience.
He said, it is clear that risk functions have played a key part in keeping firms and clients safe in a period where adapting to change has become the norm. Continued uncertainty and new regulation herald a new era in risk management; and an opportunity for risk functions to further demonstrate their vital role.