What is risk management?

There are several definitions for risk. The Institute of Risk Management, for one, defines risk as the combination of the probability of an event and its consequence. Ultimately, every organisation would choose the definition which fits their business best.

More often than not, risk management is used to signify negative consequences, however, it is important to keep in mind that taking a risk can also result in a positive outcome. This being said, the three most common risk events relate to opportunity, hazard and uncertainty.

It goes without saying that risk can never truly be eliminated – a risk materialising (whether minor or detrimental) is always a possibility and this is why risk management is so important. Risk management is essentially the pre-emptive measure of identifying potential risks, analysing their likelihood and impact (consequences) and taking all possible steps to reduce the chances of such risk materialising and thus having a negative impact on the organisation.

The types of risks that an organisation may be exposed to would depend on the line of business. Of course, some organisations face more risks than others. It ultimately all depends on the nature, scale and complexity of the business.

Being aware of the risks that the organisation is facing would allow the company to implement controls and mitigating measures which would reduce the likelihood of such risk materialising or if such risk does materialize the implemented controls would lessen the negative impact on the organisation.

Benefits of appointing a Risk Management Officer

Despite having an allocated risk manager or team to handle risk management within the organisation, risk management is the responsibility of all the employees. Without proper communication the risk management framework will not operate to its full potential. Therefore, embedding a solid risk aware culture from top management downwards and providing proper training will ensure a successful implementation of the risk management framework within an organisation.

In the realm of Company Service Providers ('CSP'), the Risk Management Function/Officer is now a mandatory position. This obligation emanated from the new rulebook which the Malta Financial Services Authority ('MFSA') issued in March 2021. Essentially, the new CSP rulebook requires the establishment and maintenance of an Independent Risk Management Function for Class C CSPs.

One of the duties of the Risk Management Function/Officer is to prepare a Risk Management Policy which naturally must be inline with the risk appetite of the organisation. This policy must be reviewed on an ongoing basis in order to ensure that all relevant policies and procedures are in place and effectively implemented.

It is important to point out that risk management in itself is an ongoing and live process and certainly not a box-ticking procedure. As aforementioned, the entire organisation needs to work collectively to ensure a successful risk management framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.