How Human Capital Data Enhances Risk Management for Financial Institutions

How Human Capital Data Enhances Risk Management for Financial Institutions
October 11, 2024 6 mins

How Human Capital Data Enhances Risk Management for Financial Institutions

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Financial institutions can increase their resilience to volatile threats through enhanced risk management frameworks and innovative models powered by people data and technology.

Key Takeaways
  1. Financial institutions face complex, globally interconnected financial and non-financial risks that put increasing pressure on their balance sheets.
  2. Threats increase as organizations digitalize through the use of AI, further driving the need for talent with cyber skills and the motivation to protect against emerging risks.
  3. Financial institutions can benefit from resilient, holistic and interconnected risk frameworks by embracing best practices in people analytics.

As digitalization and people-related risks impact the global banking industry, volatility is on the rise. Growth in competitive digital banking, changes to employee work patterns, economic pressures and continued supply chain issues all threaten the bottom line of financial institutions (FIs). 

These factors are leading to increased risks such as fraud, cyber attacks (from malicious actors externally and internally), mis-selling, potential litigation and reputational damage. Such risks embody the closely intertwined relationship between people and processes. 

 

Evolving Risk Management Frameworks 

Over the last 15 years, operational risk management frameworks have largely been driven by the rules laid down by the Basel Committee. These required globally active banks to use a combination of internal loss collection, external data and scenario analysis to measure and manage operational risk. While these practices have value, there is a growing realization of the interconnected nature of risk. 

FI leaders need oversight that enables them to better understand the link between people and operational risks. Reviewing risk management practices will provide opportunities to identify and incorporate these emerging human capital risks. In today’s world, frameworks must be connected so that firms can proactively identify risk at the source rather than reporting post-event.

Improving the Linkage Between Human Capital and Operational Risk

Human capital is an increasingly important component of operational risk. However, with increases in data quality and technology, global FIs are now able to pinpoint human capital and behaviors that are at the root of many new or uninsurable risks.

There is also evidence of global banking regulators requiring firms to focus on the human capital aspects of their business. Recent examples include the Digital Operational Resilience Act, which creates a framework to boost the IT security of the financial sector, as well as public speeches by regulators. Frank Elderson, European Central Bank Executive Board Member and Vice-Chair of the Supervisory Board, notes, “A bank can have all the risk controls in place, avail itself of the most advanced tools to manage risks and rely on data of the highest quality, but still become mired in a scandal it has brought upon itself, which badly affects its reputation owing to weaknesses in its internal culture.”1

An assessment of workforce and human capital data should be considered an important element of any operational risk review and process improvement exercise.

“We are seeing a shift in our clients’ needs and abilities. Given that people-related operational risks are more likely to profoundly impact an organization’s very existence, it’s important to consider financial and human capital risks holistically. Although this has been historically harder to measure, we now have the data and tools to help predict these events.”
Mark Miles, Partner, Human Capital Solutions, Aon

#1

Cyber attack or data breach is a top risk globally.

Source: Aon's 2023 Global Risk Management Survey

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A Resilient Risk Framework Embraces People Analytics

Human capital data and analytics can help a FI assess, plan and react to each contributing risk factor to a business or its operations. For example, assessing the state of the labor market internally and externally can help FIs reliably predict turnover while monitoring employee engagement — a key contributory factor in employee fraud.

Seventy percent of financial organizations indicate that they are losing digital talent and 42 percent are reporting challenges in filling roles that require high-demand skills.2 Failing to attract and retain the right talent threatens businesses and presents a significant human capital risk.

To combat this, leaders must effectively use employee and candidate assessment data to evaluate skills, competencies and risk-taking appetite to enhance talent selection or promotion.

61%

of confident business leaders see interconnected risk as a necessary challenge rather than a dangerous unknown.

Source: Aon's 2022 Executive Risk Management Survey

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Combining Human Capital and Risk Data to Improve Risk Management Frameworks 

To improve risk management effectiveness, finance, HR and risk leaders should collaborate to discuss potential gaps in people data. When these departments work together effectively, people risk insights can help ensure the right internal data is combined with the right external data.

A company’s culture around risk will determine how employees deal with risks individually and collectively. A risk management framework that doesn’t incorporate workforce-related risks or data can expose an FI to other business risks such as cyber, financial, crime, civil liability and directors and officers (D&O) insurance implications. Considering people as part of a risk assessment can help develop plans to mitigate the impact of these challenges. Chief risk officers can explore ways to better connect and implement people risk within company risk frameworks. 

“In this industry, if your people are dissatisfied or not engaged, the potential for risk is higher. Conversely, when satisfaction and engagement scores are higher, then the propensity for risk reduces,” notes Daniel Butler, head of the financial institutions industry for the EMEA region at Aon. “There are many characteristics of satisfaction, and human capital data provides the ultimate insight on the temperature of your people or your main risk driver.”

Assessing the Impact of AI as a Lead Risk Indicator 

In a landscape of uncertainty where the transformative power of innovation is reshaping operations in financial institutions, predicting AI’s impact emerges as a lead indicator of risk. 

By forecasting how AI can influence processes, roles and skill requirements, leaders can proactively identify potential vulnerabilities. For example, if AI is projected to automate a specific area of operations, financial institutions can foresee potential job displacements and proactively implement upskilling or reskilling programs. This helps to mitigate the human capital risk and operational disruptions. 

It is incumbent upon FIs to widen their focus to ensure they have proper oversight of emerging people-related risks. Only then will they be fully prepared for whatever comes their way. Learn more about how Aon helps financial institutions with their biggest emerging risks.

1 European Central Bank, June 11, 2022, Supervising banks’ governance: structure, behaviour and culture (europa.eu).
2 Aon's Global HR Pulse Survey #8, 2022

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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