Regulatory change and cyber threats top ranking of key risks affecting financial institutions

Regulatory change, cyber risk, non-malicious system failure, reputational damage and economic slowdown/stalling recovery were identified as the top five risks to financial institutions by senior risk managers in Europe.

Between May and August, StrategicRISK and Zurich surveyed the most senior risk professionals at financial institutions, including investment and retail banks and insurers to determine the key issues facing the financial sector.

Regulatory change was the most pressing concern for risk managers, with 91% of respondents identifying it as the biggest threat to their company. Cyber risk followed, with 65% stating that this risk was a major concern and the related cyber issue of non-malicious system failure followed closely with 51% of respondents identifying it as a key risk for their company.

Reputational damage and economic slowdown/stalling recovery followed in fourth and fifth place, with 47% and 37% of respondents respectively highlighting these areas as potential problems.

Further, the insurance market is failing to address many of these key risks, according to the survey.

When asked to list the risks that are the hardest or impossible to insure, 70% identified reputation; 53% chose cyber and 51% said technological failure.

Regulatory change was also cited as an area that was difficult to insurer. One respondent said this was an uninsurable risk and others stated ‘regulations’ or ‘regulatory impact’ as difficult to insure. This and the fact that 91% of risk managers said regulatory change was one of five top risks illustrate a landscape where risk managers are struggling with the regulatory environment.

Indeed, the regulatory environment is becoming stricter on areas such as financial reporting or data protection. Regulations that aim to protect personal data increase the compliance burden for companies and their breach may lead to fines and reputational damage.

The findings of the survey reflect a complex risk landscape, with most of the top five risks interlinking with one another thereby increasing risk exposure and potential losses.

Reputational damage, for example, can be linked to cyber risk and non-malicious system failure. Data breaches and system failures could lower public confidence, particularly when personal finances and private information are at stake.

Commenting on the survey results, Luca Ravazzolo, global financial institutions lead, global underwriting, Zurich General Insurance, said: “The survey confirms that threats facing financial institutions are interconnected. If we look at the top five risks the respondents identified, it is clear the risk of reputational damage underpins most of these top concerns.

“The pace of regulatory change poses compliance challenges and, if laws are flaunted, FIs will suffer reputational damage. If a bank’s reputation is tarnished, its revenues will drop and its top line figures plummet, but other banks’ financial fundaments will also be affected.”