Add a little “Red Bull” to your risk management

What parallels can be drawn between financial services and Formula 1? Mark Crowhurst looks at how firms can apply Formula 1 thinking to their risk management strategy.

^{Insular risk management can lead to catastrophic consequences. Find out how we're de-risking risk in financial services.}

I was catching up with a friend who worked for a Formula 1 team. We got to talking about the risk and compliance framework they operate under – well that, and how the car could go faster! It really opened my eyes to how much financial services could learn from his industry.

When it came to risk management, Formula 1 used to rely heavily upon past personal experience and education – based on ‘group think’ and pre-conceived ways to manage risks. There were no restrictions on budgets, and some teams even sought to circumvent regulation to optimise performance.

So, how does this all relate to financial services?

I see many parallels between the worlds of F1 and financial services. Both operate with tightly fixed budgets in a highly regulated environment, where the consequences of failing to properly manage risk are huge and visible to millions. Yet, whereas Formula 1 has arguably evolved to strike that fine balance between making money and managing risk, it feels like many financial services firms still have some ways to go in achieving the same.

As events show, financial risks do not operate in isolation, yet most institutions segment, manage, and own risks within individual teams. These teams rely on their own bespoke tooling and ways of working, often keeping separate data sources with differing governance models. Much of the change being pursued in these teams is a result of budgets allocated to address new regulation or remediate a supervisor’s findings, often at the expense of business-led optimisation. 

Such an imbalance can create further issues, as the business starts to anticipate risk frameworks as a “check-the-box exercise”. This is driven by some Chief Risk Officers (CROs) feeling pressured by supervisors to focus solely on the regulatory agenda. However, regulators work on consensus with the market. Their decisions are often driven by political and public pressure, which in turn is driven by experience of the past. 

This approach does not naturally lend itself to agile responses to new events. Nor does it provide the remit to allow an integrated approach that considers the interdependencies between risk types and the complexity that results from responding to changing circumstances as they arise.

Market conditions evolve more quickly – social media, AI and algorithms drive asset prices, alongside political and public sentiment – which creates a complex set of potential scenarios. This increases the scrutiny on organisations and how they mitigate risk. Managing this complexity becomes even more challenging in stressed conditions. 

What CROs and their organisations can learn from F1 thinking

As Formula 1 has shown, collaboration and preparation are key to staying ahead of complex, interconnected, and constantly evolving risks. It’s not about looking backwards to past experiences, but looking forwards to the next likely threat on the horizon.   

But how do you equip your organisation with the tools it needs to steer a safe course through the challenges it will face – in a way that both delivers value for your business and meets your regulators’ requirements? Start by taking a closer look at the way your risk framework is set up.

Here are five questions to help guide that line of enquiry:

By answering questions like these, organisations can put themselves in a stronger position to balance compliance and value creation. A well-considered risk framework also provides firmer foundations for risk preparation and response, which is essential for mitigating the negative impact when crisis does strike.

Over the next few months, I’ll be taking a look at the steps financial services firms can take to tackle these questions. Want to receive the latest updates direct to your inbox? You can subscribe to our newsletter for the latest news and insights from Baringa.

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^{Note: Baringa Partners LLP does not endorse or link our services to any of the companies referenced in this article. Any industry references are intended to be for comparison purposes only.}

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