How Human Capital Data Enhances Risk Management for Financial Institutions

How Human Capital Data Enhances Risk Management for Financial Institutions
September 12, 2023 11 mins

How Human Capital Data Enhances Risk Management for Financial Institutions

How Human Capital Data Enhances Risk Management for Financial Institutions Hero image

Financial institutions can weather industry volatility more effectively with enhanced risk management frameworks informed by people data and powered by technology.

Key Takeaways
  1. Financial institutions face complex, globally interconnected risks and new people risks, putting more strain on risk management frameworks.
  2. Given the level of stress, uncertainty and change, it’s critical for companies to review their infrastructure around people and risk.
  3. By embracing best practices in people analytics, financial institutions can benefit from more resilient, holistic and informed risk frameworks.

Volatility in the global banking industry is on the rise for many reasons, some of which include growth in digital banking, changes in where and how people work, high inflation and continued supply chain issues. Combined, these factors lead to increased operational and people-related risks such as fraud, cyber-attacks, mis-selling, potential litigation and reputational damage.

Given the current environment, financial institutions (FIs) would benefit from reviewing their risk management practices to ensure they are holistic and incorporate emerging human capital risks.

Risk Management Frameworks Must Evolve

Despite the changing landscape, traditional operational risk management frameworks have been slow to evolve. Since the introduction of Basel II in 2008, banks have used a combination of internal loss collection, external data and scenario analysis to measure and manage operational risk to comply with global regulations. While such practices have value, risk management frameworks should be more than just compliant — frameworks should be better connected and holistic, allowing companies to be proactive in identifying risk at source rather than reporting post event.

Human capital is an increasingly important component of these risks that is historically unaddressed or underappreciated in FI risk policies and models. However, with increases in data quality and technology, this perspective is set to change. Global FIs are now able to see 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. As Frank Elderson, European Central Bank Executive Board Member and Vice-Chair of the Supervisory Board, recently said,1  “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.”

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

47%

There has been a 47 percent increase in cyber-security incidents attributed to internal company staff since the pandemic.

Source: Aon 2021 Global Risk Management Survey

Quote icon

We are seeing a shift in our clients’ need and ability to consider financial and human capital risks holistically. While harder to measure, operational risks are more likely to have profound impacts on an organization’s very existence.

Michael Burke
Executive Chair of Talent, and Enterprise Client Leader, Aon

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 and enhance workforce planning. Employee and candidate assessment data can be used to evaluate skills, competencies and risk-taking appetite to enhance talent selection or promotion. Such tools not only help attract key talent, but also ongoing engagement. Aon’s survey2 finds 70 percent of financial organizations indicate that they are losing talent in the digital area, while 42 percent report challenges in filling roles that require high-demand skills.

Aon’s workforce resilience model assesses a company’s overall workforce resilience by analyzing data against a custom benchmark under three pillars: resilience, agility and belonging. FIs can use this model to assess human capital data and workforce resilience, thereby reinforcing their risk management framework and reducing overall levels of organizational and operational risk. With the data model, FIs can analyze the degree that artificial intelligence and automation are putting jobs at risk, which jobs will transform and how to reskill and upskill their workforce to prepare. Based on our data3, 70 percent of financial institutions indicate they are losing key digital skills. At the same time, a separate analysis Aon conducted on changes from artificial intelligence estimates that 27 percent of headcount in the global banking industry could be out of a job from automation. Yet, that number represents only 14 percent of jobs at the average bank. “That is a staggering amount of people who are likely to experience a high degree of technology-driven disruption,” notes John McLaughlin, partner in Aon’s Talent Solutions practice.

Assessing Workforce Resilience Across Three Pillars

61%

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

Source: Aon 2022 Executive Risk Management Survey

How Human Capital Data Enhances Risk Management for Financial Institutions Diagram

Finance, HR and risk leaders should also collaborate to discuss potential gaps in people data, which can improve risk management. These departments can work together to align pay to performance, make proper budget changes to support risk management initiatives and provide business leaders with deeper insight into complex, people-related risks.

Sustaining an Improved Risk Management Framework

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 a 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 should 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. When they’re satisfied and engaged, your risk drops,” notes Daniel Butler, head of the financial institutions industry for the EMEA region at Aon. “There are many characteristics of satisfaction, and data provides the ultimate insight on the temperature of your people or your main risk driver.”

Regulation will continue to primarily focus on capital requirements and overall financial risk. It’s 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 Global HR Pulse Survey #8, 2022
3 Workforce Resilience Diagnostic Model Insights; 2022 Aon Workforce Resilience Risk Benchmark; Aon 2022-2023 Global Wellbeing Survey

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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