Introduction

It was recently announced that the insurance sector faces tougher scrutiny to address financial security risks, with a new 3 point plan aimed to promote a more resilient, innovative insurance industry. With Mark Carney, The Bank of England’s Governor backing this plan we expect to see the insurance sector take heed and seek new ways to improve their stability.

Furthermore, A report commissioned by the European Union highlighted that technology is a key driver of innovation and growth, but it also raises risks within the marketplace. Although more reliable and responsible financial systems are being encouraged by the European Commission to improve stability, money not only needs to be invested into such systems but also into risk management practices around them.

Whilst the financial sector focusses heavily on operational, investment or political risk, reputational risk is a crucial one – referring to the damage of reputation of an organisation, which can have a wider effect on the marketplace as a whole.

Reputational Risk – the business impact

Banks have been aware of reputational risk for a while now, with 52% of companies in 2005 seeing this as a risk in itself according to the Economist Intelligence Unit. The majority of financial organisations feel that reputational risk needs to be controlled effectively to sustain a stable, growing business, and this all comes down to market and investor perception. It’s entirely realistic that financial organisations will, at some point, experience a loss of function due to IT downtime. Failure to plan sufficiently for this can result in the following impact to the business:

  1. Market Perception is that the company is dead in the water, at least for the time being.
  2. Investors panic causing unsteadiness in the market.
  3. The business focusses on regaining IT availability rather than focussing on regrouping the business.
  4. Confidence continues to slide and loss of reputation causes irreparable damage to the business.
  5. A negative impact on earnings, liquidity and capital position sets not only the organisation back significantly, but damages the confidence in the market as a whole.

So how can the financial sector balance innovation with reputational risk?

Due to the fact that more advanced technology has been cited as one of the solutions to provide improved stability for financial organisations, it’s imperative to balance with this the resilience of IT systems and demonstrate confidence to investors and the market.

If your disaster recovery records are part of your pitch to investors, then they will hold fast in the event of an IT outage and investors will wait for implementation rather than panic.  As such, they will steady the marketplace and give your organisation time to regroup all other parts of the business, rather than focussing on IT. In addition, if you can repeatedly prove you have a valid DR solution as part of your investment pitch, the risk management team on the investment group will stand down from the technology and focus on the fund managers, which is where they want to be. Thus their reputational risk as risk managers is minimised as well. Finally if you’re bold enough to challenge them to put other investment funds through due diligence tests, and are confident enough to do this at a moment’s notice, plus you can tick all their boxes from a disaster recovery stance then you’ll soon find the questions go away and the confidence from the investors erodes away your reputational risk.

Summary

Reputational Risk needs to be managed, particularly in the financial industry which has suffered so much instability over the years. Whereas technology has been pinned as one way to help stabilise the market, it also leaves it more vulnerable to instability should it fail. Tackling the unreliability of technology with a really strong disaster recovery solution leaves the sector able to gain advantage from market and investor confidence, therefore minimising your chance of reputational risk.