New Product Oversight and Strategic Initiative Oversight Dolores

  • Slides: 28
Download presentation
New Product Oversight and Strategic Initiative Oversight Dolores Atallo Firm Director, Deloitte April ,

New Product Oversight and Strategic Initiative Oversight Dolores Atallo Firm Director, Deloitte April , 2011 1

Today’s Discussion § Introduction and Session Objectives § New Product Oversight § New Product

Today’s Discussion § Introduction and Session Objectives § New Product Oversight § New Product Regulatory Guidance and Industry Perspective § Critical Success Factors for the New Product Approval Process § Drivers of New Product Opportunities § Strategic Initiative Oversight § Strategic Risk Oversight Considerations § Tools for Strategic Risk Oversight § The Role of Enterprise Risk Management (ERM)L § Q&A 2

 Introductions and Session Objectives § Financial Institutions are facing more pressure than ever

Introductions and Session Objectives § Financial Institutions are facing more pressure than ever before from new Financial Regulatory Reform and more stringent standards and limitations on certain business activities. § Part of that increased scrutiny focuses on the new product and strategic initiative oversight processes, including: § § Consideration of regulatory compliance requirements Creating/enhancing a robust new product process Drivers of new product opportunities The role of risk management practices in strategic and new product initiatives 3

New Product Governance 4

New Product Governance 4

 Defining a “New Product” New Product Quiz A New Product is defined as

Defining a “New Product” New Product Quiz A New Product is defined as a product or service……. § § § A: never before provided by the institution B: previously provided but with changes, enhancements and/or modifications C: previously provided but ramping up due to market opportunity D: currently/previously offered but now subject to a change in regulation or policy E: all of the above 5

 New Product Regulatory Guidance and Industry Perspective Remarks by Federal Reserve Board Governor

New Product Regulatory Guidance and Industry Perspective Remarks by Federal Reserve Board Governor Susan Schmidt Bies (2004) • New products include products or services being offered to, or activities being conducted for the first time in, a new market or to a new category of customers or counterparties. For example, a product traditionally marketed to institutional customers that is being rolled out to retail customers generally should be reviewed as a new product. Defining New Products • Significant modifications to products, services, and activities or their pricing warrant review as a new product. • Small changes in the terms of products or the scope of services or activities can greatly alter their risk profiles and justify review as a new product. • When in doubt about whether a product, service or activity warrants review as a new product, financial firms should err on the side of conservatism and route the proposal through the new-product approval process. • Cutting short a new-product review because of a rush to deliver a new product to market, or because of performance pressures, increases the potential for risk. Source: Remarks by Governor Susan Schmidt Bies, At the Bond Market Associations Legal and Compliance Conference, New York, NY February 2004 6

 New Product Regulatory Guidance and Industry Perspective Standard & Poor’s Rating Criteria and

New Product Regulatory Guidance and Industry Perspective Standard & Poor’s Rating Criteria and Best Practices ERM For Financial Institutions • The NPA process should be clearly documented in the risk management policy handbook and should clearly articulate the steps required for approval. Industry Practices for New Product Oversight/ Approval • There should be a specified time period of no longer than six months after the transaction is initially approved for trading, after which its reviewed for consistency. All transactions that go through the NPA process should be documented and tracked through secure databases and electronic media. • No proposed transaction should be expected to trade without a model validation and vetting by Risk Management and a clear understand of the risk profile of the transaction and its implications on the overall risk appetite of the firm and its reputation. • The CRO must be a member of the NPA committee and should be granted the authority to sign off on all transactions. The NPA committee should include senior individuals from all the decision support areas, namely, Operations, Legal, Tax, Audit, Accounting, Risk Systems, Risk Analytics, Compliance, and Documentation, as well as the representatives of the business units. Source: Standard & Poors, Enterprise Risk Management for Financial Institutions, Ratings Criteria and Best Practices November 2005 7

 New Product Regulatory Guidance and Industry Perspective NASD and FINRA Complex Product Guidelines

New Product Regulatory Guidance and Industry Perspective NASD and FINRA Complex Product Guidelines Guidance For Complex Products • A new product committee may condition approval for a complex product on specific limitations, such as limiting the sale of the product to customers meeting certain characteristics and sophistication thresholds; or restricting the right to market or sell the product to representatives who have completed certain product-specific training courses. • Products approved on the basis of these restrictions, or based on critical market assumptions, should be subject to a formalized, ongoing review of the conditions of approval for up to one year. Customer complaints relating to the product should also be tracked and monitored. • Some products may be approved by a new products committee subject to certain restrictions, such as: “No more than X percentage of a customer’s net worth may be invested in Y product, or any product similar to Y. ” • A new product committee should not approve a product based on such a condition unless it has determined, prior to approval. that the limitation is feasible from the perspective of training, supervision and operations • Bright line Suitability Tests for Complex Products. • Certain “bright line” tests relating to the suitability of new products have emerged through regulatory guidance, Sources: 1 NASD Notice to Members 05 -59, “Structured Products - NASD Provides Guidance Concerning the Sale of Structured Products, ” September 2005 2 FINRA Regulatory Notice 10 -09, “FINRA Reminds Firms of Their Sales Practice Obligations With Reverse Exchangeable Securities” February 2010 8

 New Product Regulatory Guidance and Industry Perspective US Treasury Department Report on Financial

New Product Regulatory Guidance and Industry Perspective US Treasury Department Report on Financial Regulatory Reform • • • CDOs and Financial Regulation • • Federal banking agencies should promulgate regulations that require originators or sponsors to retain an economic interest in a material portion of the credit risk of securitized credit exposures. Regulators should promulgate additional regulations to align the compensation of market participants with longer term performance of the underlying loans. The Securities and Exchange Commission (SEC) should continue its efforts to increase the transparency and standardization of securitization markets and be given clear authority to require robust reporting by issuers of ABS. The SEC should continue its efforts to strengthen the regulation of credit rating agencies, including through measures to promote robust policies and procedures that manage and disclose conflicts of interest, differentiate between structured and other products, and otherwise strengthen the integrity of the ratings process. Regulators should reduce their use of credit ratings in regulations and supervisory practices, wherever possible. Source: US Treasury Department Report on “Financial Regulatory Reform–A New Foundation: Rebuilding Financial Supervision and Regulation” in June 2009 9

 New Product Approval Policy: Setting the Tone • Set new product definition for

New Product Approval Policy: Setting the Tone • Set new product definition for the institution – Define parameters and exceptions • Define roles and responsibilities – Submission, approval and ratification • Provide a common language and approach for new product assessment – – Articulate new product risk appetite Describe acceptable and prohibited products Define the exception process Define an escalation protocol 10

 New Product Approval Policy (Illustrative) Illustrative Board of Directors Risk Committee CRO New

New Product Approval Policy (Illustrative) Illustrative Board of Directors Risk Committee CRO New Product Committee Approve/Ratify Policy Objectives Policy Requirements Scope/ Description (Policy Statement & Scope) Definition of a New Product Establish New Product Approval Policy Roles & Resp. *New Product Approval Process Policy Exceptions* Policy Admin. *Related Polices Definitions* Appendices ** Glossary NPA Form Listing of Approved Products 11

 The Role of the New Product Approval Committee (NPA) The NPA Charter should

The Role of the New Product Approval Committee (NPA) The NPA Charter should reflect the objectives, scope of authority, duties and practices of the Committee and can include the following components: • Committee Authority • Decision vs. Information • Duties • Committee Protocols • Agenda • Minutes • Meeting frequency • Membership (Voting and Non-voting) • Examples New Product Committee practices can include: • Review and perform an assessment of the New Product • Make Recommendations on New Products to Enterprise Risk Committee. • Oversee the New Product Approval Process, i. e. ensuring documentation is collected analyzed prior to recommendation • Maintain and update the New Product Form, NPA Policy and NPA Process as frequently as significant changes occur • Monitor new product performance. 12

 New Product Committee (NPC) Protocols Illustrative Board of Directors ERM Function/CRO Risk Committee

New Product Committee (NPC) Protocols Illustrative Board of Directors ERM Function/CRO Risk Committee Approve/Ratify Establish NPC Charter Constitution, Membership and Meetings Authority Duties Quorum/ Voting Agenda Meetings Minutes Members Comm Chair Committee Secretary Charter Administration 13

 New Product Approval: Supporting the Business Case • Define sponsorship process for submission

New Product Approval: Supporting the Business Case • Define sponsorship process for submission – Who can submit a new product for approval? – What documentation is required? • New product risk assessment – Consider impact to the institution’s risk profile – Leverage existing risk management practices • Risk categories, Metrics/Key Risk Indicator • Assess profitability – Key Metrics • Cost to market, Capital impact, Projected P&L • Approval authority – Role and responsibilities • NPA Committee, Senior Management, Board of Directors 14

 New Product Approval Form (Illustrative) New Product/Initiative Approval Form Instructions for completing the

New Product Approval Form (Illustrative) New Product/Initiative Approval Form Instructions for completing the New Product/Initiative Approval Form: 1. The Sponsoring Business Unit (“SBU”) should complete New Product/Initiative Summary Worksheet (pages 1 and 2) authorize it, and provide to the Head of ERM for review 2. The SBU should complete the New Product/Initiative Detailed Worksheets in consultation with the appropriate Risk Owners (see Appendix A - List of Risk Owners ) 3. Risk Owners should sign off on their appropriate sections within the New Product/Initiative Detailed Worksheets 4. The New Product/Initiative Approval Form must be approved by the Head of ERM and the Chief Risk Officer 5. The New Product/Initiative Approval Form will be provided to the Enterprise Risk Committee for their review and approval New Product/Initiative Summary Worksheet Product/Initiative Information Name of Product/Initiative: SBU: Cost of Initiative ($): Planned Launch Date: Target Approval Date: Product/Initiative Description Describe the product/initiative: Describe the Strategic Objectives of the product/initiative? What process changes are being impacted by this product/initiative? What people changes are being impacted by this product/initiative? What technology changes are being impacted by this product/initiative? Risk Summary # Risk Category Risk? 1. 2. 3. 4. 5. 6. 7. New Material Risk? Credit Risk Market Risk Liquidity Risk Operational Risk Compliance, Regulatory and Legal Risk Strategic Risk Reputational Risk No Yes No Yes Provide brief explanation below for both No and Yes: 15

 New Product Approval Form (cont’d-Illustrative) New Product/Initiative Profitability Analysis Estimated Volume: Volume Estimated

New Product Approval Form (cont’d-Illustrative) New Product/Initiative Profitability Analysis Estimated Volume: Volume Estimated Profitability: Pre-Tax Income Net Income ROA ROCE Net Margin Risk Adj Margin Non-Spread Revenue Total Revenue Non-Spread % To Total Revenue Credit Quality: Net Charge-Offs % to AFR Provision Estimated Expenses % to AMA Efficiency Ratio New Product/Initiative Profitability Analysis Please Provide assumptions related to the Product/Initiative Analysis (Term Capital allocation, Cost of funds, etc. ): Yr. 1 $ - % % $ - % Yr. 2+ $ - Yr. 2 $ - % % $ - % $ - $ - % % $ - % % Sponsoring Business Unit Approval Authorized by: Name: Signature: Date: Approval Head of Risk Management: Name: Signature: Date: Product Cancelled/Deferred: Chief Risk Officer: Name: Signature: Date: Date of Cancellation/Deferral: 16

 New Product Approval Process • Final Approval § Upon the recommendation of the

New Product Approval Process • Final Approval § Upon the recommendation of the New Product Committee, approves new products and services to be offered • Recommendations for Approval § Oversees the New Product Approval Process/Policy § Reviews New Product documentation to ensure full evaluation of risk is performed. § Makes Recommendations on New Products to Enterprise Risk Committee. § Risk leaders sign off after vetting of new product and New Product Committee meeting is complete. Executive Management Committee (Approval) BOD Final Approval For Some New Product Recommended for Approval New Products New Product Committee (Review and Approval) • Completion of New Product Form § Works with business line to solicit input on potential benefits and risks of new product. § Should ensure that all necessary documentation is collected and researched to complete New Product Form. SBU Introduces New Product Sponsoring Business Unit (Pitches New Product) 17

 Drivers/Triggers for the New Product Approval Committee • New Regulation, i. e. :

Drivers/Triggers for the New Product Approval Committee • New Regulation, i. e. : – Dodd-Frank Act • The “Volcker” Rule – Will cause banks to exit certain proprietary businesses/products • Compensation and Governance • Living Wills/Basel III – Capital Impacts of products and services • New Regulators, i. e. , – Dodd-Frank Act • Systemic Oversight Council • Consumer Financial Protection Bureau • Migration of OTS oversight to OCC • Changes in market conditions – Changes in market conditions can drive the need to for new products including hedging strategies for risk mitigation purposes or new products to capitalize on shifting consumer market demand. 18

 Critical Success Factors for a Robust New Product Approval Process • The definition

Critical Success Factors for a Robust New Product Approval Process • The definition of what is considered a New Product should be socialized across the company to ensure accountability and compliance. • There should be clear delegations of authority for approval, review by constituents of business plan, and agreed materiality thresholds. • The New Product Committee should have disciplinary authority in place to address non-compliance. • The Board of Directors should ratify product changes and in cases of changes in strategy have approval authority. 19

Strategic Initiative Oversight

Strategic Initiative Oversight

 Strategic Risk Oversight Key Considerations • Recognize strategy, strategic planning and assessment as

Strategic Risk Oversight Key Considerations • Recognize strategy, strategic planning and assessment as an on going cycle – Build in touch points • Integrate existing risk practices into the strategic planning and assessment process – Consider risk by category – Establish metrics/limits for on going monitoring – Align strategic initiatives with committee oversight • Determine protocols for assessment of risk to achieving strategic objectives: – Role of Board, Management and Risk/Chief Risk Officer – Articulate risk appetite and limits • Timing and escalation protocols 21

 Strategic Risk Management Considerations Component Risk management culture Evaluation criteria ¡ High level

Strategic Risk Management Considerations Component Risk management culture Evaluation criteria ¡ High level of involvement throughout the organization ¡ High-quality, well-structured risk management practices ¡ Accuracy of risk identification and monitoring Risk control Extreme event management Strategic risk management ¡ Availability and effectiveness of programs for compliance and post loss remediation Risk control proces ses Extreme event manage ment Risk & econo mic capital model s Risk management culture ¡ Use of scenario analysis and stress testing which flow into an early warning system and a disaster and contingency plan ¡ Ability to mitigate risk and keep an adequate amount of catastrophe reinsurance Risk and economic capital models Strategic risk management ¡ Capacity to develop and use accurate risk and economic models ¡ Capability to validate the data and results of these models ¡ Processes to ensure proper alignment of retained risk profiles ¡ Maintenance of metrics for strategic asset allocation and risk-adjusted return 22

 Risk Assessment of Strategic Business Objectives and Initiatives Strategic Planning Risk identification Risk

Risk Assessment of Strategic Business Objectives and Initiatives Strategic Planning Risk identification Risk assessment and prioritization Key activities ¡Review 3 -5 year business plan, ¡Based on information gathered, create ¡Develop likely and worst case business objectives, company goals and customized and company-specific risk scenarios from key external strategies profile risks ¡Gather research, documents, to identify ¡Develop risk ranking criteria (impact, ¡On going discussion to potential strategic initiatives vulnerability, speed of onset) prioritize key strategic and emerging risks for scenarios ¡Document and prioritize strategic initiatives ¡Develop monitoring roadmap for tracking strategic initiatives milestones and periodic status reporting On going cycle of planning, assessment and prioritization 23

 Tools For Assessing Strategic Risk • Peer Benchmarking • Consider performing a benchmarking

Tools For Assessing Strategic Risk • Peer Benchmarking • Consider performing a benchmarking analysis against industry peers • Executive Workshops • • • Identify risks against strategic objectives Critically evaluate strengths and weakness and target weakness Reassess regularly • Top down risk assessment • Identify and prioritize top 10 risks to the organization to achieving objectives • Scenario analysis • • Stress test business plans for relevant threat scenarios (e. g. , economic downturn, cat and large losses, competitive pressures, etc. ) ERM’s should focus on preparation of risk mitigation strategies that are designed to support senior management’s business plan Work closely with the finance and investment and functions to demonstrate the sensitivity of business plans to external factors, underlying assumptions and unanticipated variance in assumptions. Provide research and analysis on external trends that would inform senior management decision making regarding areas of growth or investment • Risk Selection • • • Assess and react to short term and long term market conditions to choose which risks to take and which to retain: Consider using Risk Reward analysis or just combined ratio targets Cycle Management (Credit, Interest Rate or Equity Market Cycles) • Strategic trade-offs in Investment Selection • • Assess risks based on risks embedded in products Recognize long term view of risk adjusted returns of investment choices 24

Enterprise Risk Management can Facilitate Strategic Risk Oversight and the New Product Approval Process

Enterprise Risk Management can Facilitate Strategic Risk Oversight and the New Product Approval Process Management actions Risk/Reward frontier Reward • Risk = same reward with lower risk = higher reward with same risk = higher reward with appropriately higher risk Capital allocations • Strategy • ERM provides a framework for assessing the benefits and risks of various strategic decisions: – Identifying the potential risks inherent in a new strategy – Determining the changes in control frameworks, governance, and reporting required to support a new strategy – Measuring the impact of strategic decisions on company value on a risk-adjusted basis ERM processes can be used to assess how specific management actions move the company on the risk/reward frontier: – Providing a cost benefit analysis of specific risk mitigation activities – Determining the set of activities to be deployed in the event of an extreme risk event Management can use ERM to determine the most efficient allocation of capital across the organization: – Using models to determine necessary levels of capital to support each business and its risk Communication • The insights gained through robust ERM practices allow management to communicate more effectively about risk: – Designing clearer and more informative risk disclosures that go beyond the minimum requirements to better inform stakeholders – Developing more robust risk reporting frameworks 25

Questions & Answers

Questions & Answers

 Presenter Biography Firm Director Financial Services Industry Governance Risk & Regulatory Deloitte &

Presenter Biography Firm Director Financial Services Industry Governance Risk & Regulatory Deloitte & Touche LLP New York, NY +1 212 436 5346 datallohazelgreen@deloitte. com Experience: Over 20 years experience assisting clients in building, enhancing and integrating their risk management practices. Education: Rutgers University B. A. Information Management, M. B. A. Finance Dolores Atallo is a Firm Director and a tenured leader in the Governance Risk And Regulatory Strategy financial services practice focusing on Enterprise Risk Management (ERM), Corporate Governance, Enterprise, Credit and Operational Risk. Currently, she is the Co-Lead of the Deloitte Financial Reform Center of Excellence and the US Leader for Living Wills. She also serves as the National Relationship Leader for the Federal Home Loan Bank System. Dolores has extensive experience assisting clients in building, enhancing and integrating their risk management practices from the Board of Directors to the business process level. She advises the firm’s financial services clients on full life cycle risk management projects, by designing and enhancing ERM programs that assess risk as business impact and analyze opportunities to efficiently leverage risk, control and compliance initiatives. In this role, she advises board members and senior management in matters of governance practices, committee charters and structures, articulation of risk appetite, thresholds, metrics and risk program branding, linkage to strategy, cultural integration and program implementation, including training and facilitation. Prior to joining Deloitte & Touche in 1996, Dolores was a charter member of Coopers & Lybrand’s In-Control Services Practice, an early adopter among the Big Four to focus on the linkage between governance, risk management, internal controls and regulatory compliance. She specialized in risk management and regulatory services for the financial services industry and also served as the global leader for COSO training. Dolores speaks and publishes extensively on topics related to enterprise risk management most recently for the Federal Financial Institutions Examination Council (FFIEC), Fiduciary Investment Risk Management Association (FIRMA), the Professional Risk Managers International Association (PRMIA) and International Financial Services Association (IFSA). 27

This presentation contains general information only and Deloitte is not, by means of this

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright © 2011 Deloitte Development LLC. All rights reserved. A member firm of Deloitte Touche Tohmatsu 28