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Fiduciary Key Risk Indicators

Fiduciary Key Risk Indicators. FIDUCIARY INVESTMENT RISK MANAGEMENT ASSOCIATION NATIONAL CONFERENCE April 25-29, 2009 New Orleans Presented by Rebecca Bugaj Zak, Counsel, ReedSmith LLP Deborah Austin, Vice President, Director Personal Fiduciary Risk Mgmt and Compliance, Union Bank.

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Fiduciary Key Risk Indicators

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  1. Fiduciary Key Risk Indicators FIDUCIARY INVESTMENT RISK MANAGEMENT ASSOCIATION NATIONAL CONFERENCE April 25-29, 2009 New Orleans Presented by Rebecca Bugaj Zak, Counsel, ReedSmith LLP Deborah Austin, Vice President, Director Personal Fiduciary Risk Mgmt and Compliance, Union Bank

  2. KEY RISK INDICATORS • What are they? • Key Risk Indicator (“KRI”): Indicator of a possibility of a future adverse impact. • Indicator: Warning signals • Possibility: May or may not actually occur • Future: Trying to understand the future, not criticize past actions • Different than a Key Performance Indicator (“KPI”): Measures how well something is being done.

  3. FIDUCIARYKEY RISK INDICATORS • What is their place of importance? • Enterprise Fiduciary Risk Management Program • Identifies, Monitors, Manages, and Reports Fiduciary Risks • Part Legal, Part Compliance, Part Operational • Fiduciary KRI’s are Integral to “Identification”

  4. FIDUCIARY KEY RISK INDICATORS • Why are they important? They promote a culture of compliance with fiduciary principals and adherence to laws and regulations, which ultimately will… • Mitigate losses, legal expenses, and/or regulatory sanctions/penalties; and • Become a tool to promote business efficiencies and effectiveness as a driver of resources (people, technology, capital)

  5. FIDUCIARY KEY RISK INDICATORS • Choosing Key Risk Indicators • Include Senior Management, Business Units (Fiduciary and Affiliates), Risk, Finance, Technology, Compliance, Legal, Ethics Office, Fraud/Investigative Units, and Internal Audit • Focus on critical areas for your institution • Your Business Model and Strategic Plans • Current Product Offerings • New Products/Acquisitions/Divestitures • Support risk monitoring • Support business decision making

  6. FIDUCIARY KEY RISK INDICATORS • Build the framework • Not as easy as it sounds: Realistic implementation timeframes • Clear definition/hypothesis: What is being measured? Why? Is it meaningful? • Define categories, factors, sources, detail • Types of indicators: risk, performance, leading, lagging, control • Meaningful triggers for your institution • Management Responses to Triggers • Dynamic and evolving

  7. FIDUCIARY KEY RISK INDICATORS • High-Level Indicator Categories • People Indicators • Client/Business Indicators • Fiduciary Oversight/Administration Indicators • Compliance Indicators • Legal Indicators • Asset Management/Portfolio Indicators • Audit/Regulatory Indicators • Operational/Technology Indicators • Affiliate and Third Party Provider Indicators

  8. FIDUCIARY KEY RISK INDICATORS • More Detailed Indicators • Audit/Exam Issues Open, Past Due, High Risk • Compliance Issues Open, Past Due, High Risk • Pending and Open Litigation, Legal Expenses • Employee Turnover • Code of Ethics Violations • New Product Initiatives • Acquisitions/Divestiture Initiatives • Client Complaints • Accounts Closing (service, fee, performance issues) • Reliance on third parties and completed monitoring

  9. FIDUCIARY KEY RISK INDICATORS • More Detailed Indicators (continued) • Fiduciary Oversight and Administration • Account Acceptance Exceptions • Fee Exceptions • Volume of “accommodation business” • Volume of accounts with shared fiduciary responsibility • Estates open greater than 1 year • Account closings/distributions open longer than “x” months

  10. FIDUCIARY KEY RISK INDICATORS • More Detailed Indicators(continued) • Asset Management/Portfolio Indicators • Account reviews not completed • Investment Style Appropriateness • Proprietary Product Performance • Portfolio guideline exceptions • Completion of Investment Security Analysis • Brokerage Placement exceptions • Conflict Transactions (own bank securities, proprietary mutual funds) • Client Proxies outside of parameters • Counterparty Exposure

  11. FIDUCIARY KEY RISK INDICATORS • More Detailed Indicators (continued) - Operational Indicators • Overdrafts/Uninvested Cash • Reciept/Disbursement Volumes • Unpriced Assets or Pricing/Valuation Outside of Standard Pricing Systems • Trade Errors • Open/Aged Reconciling Items • Fraud Instances • Missing Account Data • Other dollar losses

  12. FIDUCIARY KEY RISK INDICATORS • More Detailed Indicators(continued) • Compliance/Legal Indicators • Disclosure Practices: failure to provide form ADV • Failure to get approval for marketing/advertising/communications for sale of fiduciary products • Number and amount of high risk country wire transactions • Percentage of clients in business activities/locations rated high risk for AML • Number of non-standard client contracts

  13. FIDUCIARY KEY RISK INDICATORS • Trust Company Example • Frequency of review (Monthly/Quarterly) • Categories • Leading, Lagging and Concurrent • Established and agreed upon thresholds • Green, Yellow, Red indicator system • Change in risk (up, down, same) • Identify factors that contribute to the indicator and any change • Outlook • Who Tracks and Provides the Information?

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