Risk appetite and risk tolerence - a consultation paper

Under the overall direction of a working group from the Institute of Risk Management a consultation paper has been compiled on risk appetite and risk tolerence.

The group held a series of meetings to explore ideas and agree on the direction of the paper. After healthy discussions, and given the nature of the topic, there were areas that proved contentious. This outline of thinking was presented in various meetings and a draft of the paper circulated to in excess of fifty individuals. The institute has now circulated it for wider consultation knowing that future editions of this guidance may well be subject to major revisions. This will be a sign of good and healthy progress and it is in that context that we present this paper for your comments.

The purpose of this paper is in the first instance to provide guidance to directors, risk professionals and others tasked with advising boards on compliance with the part of the UK Corporate Governance Code that states that the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives (Financial Reporting Council, 2010).

However, it is hoped that the approach contained in here will have far broader resonance with anyone interested in the subject of Risk Appetite and Risk Tolerance. While this is not a subject with an untarnished history: most UK banks would have been expected to define their risk appetite, we are now poised to move beyond that thinking. Not a single bank would have said that it wished to court (and in some instances succumb to) oblivion in the form of the financial crisis. Whether it is a matter of setting, monitoring or overseeing risk appetite, this is a subject that has proved to be somewhat elusive -it means many different things to many different people. For example, some see it as a series of limits, some see it as empowerment, some see it as something that has to be expressed in terms of net risk and others gross. For this reason the subject deserves some serious attention.

In writing this paper, the institute were conscious that it may appear to have come at this from a UK, quoted company-centric perspective and that this is counter to IRM's international ethos. In fact, while this guidance has been written with the UK Corporate Governance Code in mind, it has also been developed in the hope that it is applicable to all sectors in all geographies. We would welcome feedback from readers in this regard.

Full details of the consultation paper can be found at the link below.