Global conflict, bush fires, flooding and political unrest. These are just some of the key issues unearthed as a result of the Institute of Risk Management (IRM) asking its senior members what their risk predictions are for 2020. In Part 3 of Risk Xtra’s comprehensive round-up, practising risk professionals focus on the financial services sector, healthcare and the nuclear industry.
Darius Mayhew SIRM, head of finance risk, assurance and advisory at the Direct Line Group (and speaking on behalf of the IRM’s Financial Services Special Interest Group), said: “Is there more peace in the financial services industry given the results of the December 2019 General Election? The reality is that there will still be some uncertainty in 2020 as Parliament tries to finalise the vote on the Brexit Withdrawal Agreement and negotiate a free trade agreement with the European Union. Underpinning all of this remains the possibility of a ‘no deal’ Brexit given the ambitious timescales or a lack of clarity with regards to financial services arrangements as part of a future trade deal. Hence, although there’s some degree of respite in the short term, firms will need to continue to monitor any potential risks that arise due to negotiations or the lack thereof.”
According to Mayhew, given the proliferation in the use of digital technologies within certain financial services segments, the sustainability and competitiveness of the business model would undoubtedly be an upside and downside risk-related discussion in Boardrooms. “The adoption of some of these various technologies was widespread in 2019, such as distributed ledgers and or mobile technology. Implementation is somewhat disjointed, and especially so for larger firms where investment is targeted at particular operations. Larger firms are likely to reflect on the success of these technologies and continue to consider how best to stay competitive with the smaller, newer and more efficient digital savvy firms. As such, we may see a further embedding of these technologies by looking at end-to-end processes or applying a ‘Systems Thinking’ approach to their operations.”
It’s not unusual to focus on technological or economic factors when thinking about risk factors. “However,” added Mayhew, “let’s not forget the people element which could be equally disruptive from a sociological or firm-specific perspective. As firms think about their business models, there would undoubtedly be an impact on people and the on-shore/off-shore dynamic. With the move towards greater digitisation of the end-to-end processes or applying a ‘Systems Thinking’ approach to operations, firms may have to recruit much more individuals with a different skill set. There’s likely to be a continued decrease in the off-shoring presence. In either scenario, you’re likely to see an increase in demand for fewer higher-skilled roles across economies.”
If such a shift becomes more systemic then this can have unexpected impacts on the wider economy which could impact other parts of the financial services sector – this however is equally dependent on the continued appetite of consumers for such developments. After all, we have seen digital savvy challenger banks focussing on face to face interaction as part of their business models. Perhaps these firms are seeing a consumer shift in wanting this more personalised approach combined with the tools that allow 24-hour banking capability. This differentiation can cause competitive issues for the larger players which are reducing their human interfaces.
In the 2020 US Federal supervisory priorities, the Federal Reserve Board and the Office of Controller of the Currency both highlight operational risk as a threat to the safety and soundness of the financial system. This isn’t dissimilar to the UK’s regulatory approach given the recent consultations from the Prudential Regulation Authority and Financial Conduct Authority. A key consideration for financial services firms in 2020 is how they can effectively demonstrate resilience given potential changes to business models, increasing complex digitisation, cyber security threats and reliance on third parties including the continued move to concentrated cloud providers.
“Artificial Intelligence (AI) in particular will continue to become more sophisticated and firms are likely to place even more reliance on the algorithms. As regulators become more up to speed which such technologies, there’s likely to be an increase in scrutiny in these areas. As the regulators increase their level of scrutiny, firms may struggle to demonstrate how their technology may or may not be working to the benefit of the consumer. This is particularly the case given the privacy agenda, the debates that we’ve seen in relation to bias and the discussions around how you can teach ethics to AI.”
In summary, Mayhew feels there is unlikely to be any significant disruptions in 2020, but the continued evolution of the existing digital agenda and the philosophical questions that this raises in terms of the people element will have to be front and centre of thought processes. “Firms will continue to be slightly cautious given the continuing uncertainty, but may take bigger risks around digital implementation to sustain their business models and reduce cost while balancing their resilience given the cyber security landscape in order to maintain customer outcomes.”
Steve Treece CFIRM, head of corporate risk for the Corporate Portfolio Office at NHS Digital, observed: “The health sector faces manifold risks and opportunities in 2020. As a headline, the sector is undergoing huge, but essential transformation while managing enormous operational pressures, recovering from large financial deficits and addressing major performance difficulties.”
Continually rising demand for healthcare, arising largely from advances in medical science and an ageing population, requires the sector to change its direction of travel. The sector is adopting a range of measures designed to meet future needs, including new models of care, increased system working, establishing parity of esteem between mental and physical health and moving care out of hospital closer to the community.
In the NHS, the required changes are underpinned by the Long-Term Plan, which provides for the first time, as the name suggests, a long-term strategic direction. The objectives are ambitious and implementation will require time and clear prioritisation. The headlines are: more focus on prevention, increased investment in mental health, improved outcomes for children and in specific disease groups (cancer, diabetes, cardiovascular, respiratory, stroke and mental health), growing the workforce, mainstreaming digital access to care, balancing the books and delivering efficiencies and rolling out Integrated Care Systems (ICS) across the country by 2021.
Successful implementation has several critical dependencies and gaps, including:
*Delivering a sustainable solution for social care where a promised Green Paper is still awaited
*Publishing the final version of the National Workforce Plan and demonstrating how this will deliver required increases in nursing and GP numbers
*Fully resolving capital funding and going beyond promised new hospitals by addressing the growing backlog in maintenance of vital health infrastructure
*Resolving the increased emphasis on prevention with cuts made over several years in public health budgets
*Recovery of performance targets, including ambulance response times, A&E waiting times, time to elective treatment and cancer waiting times (this, in turn, has dependencies on the outcome of the Clinical Review of Standards and the National Workforce Plan
*Ensuring that promised funding is received and deployed in an effective manner
*Delivering legislative changes required to fully deliver system working: interim work-arounds will bring risk, and especially so if maintained over a lengthy period
In terms of system working, the NHS is moving to a less devolved, more centralist managed approach driven by the coming together of NHS England and Improvement and their establishment of seven new regional teams.
“Specific illustrations of system working include collaborative arrangements between Hospital Trusts and the centralisation of some specialist services, for example, acute stroke services, and bringing together separate back office functions, such as procurement. The benefits from success are considerable, in terms of both improvements in patient care and efficiencies in delivery. However, these will need to be balanced against inconvenience arising from the centralisation of services and pressure from local communities, which understandably wish to retain a full range of health services within their immediate locality.”
A further example is the establishment (to be completed by 2021) of ICS such that there’s one strategic health and care commissioner per ICS, better aligned to local Government. There are significant opportunities from removing silos and duplications in activity. However, risks may arise from disturbing established vested interests and the potential for, at least short term, ambiguity in accountabilities creating confusion.
“Successful delivery of the level of system working required will entail significant cultural change, improved relationships across the system and different (perhaps less competitive) behaviour from leaders and managers.”
Treece continued: “The Government’s commitment to increased long-term funding, to be embedded in law in 2020, is clearly to be welcomed. However, there are risks to the effective deployment of this funding. In addition, until the issue of social care provision and funding is resolved this will continue to present problems to the NHS, for example, by delayed discharge of patients at the end of hospital stays.”
“There are also risks to the funding provided keeping pace with exponentially increasing demand, enabling performance and deficit recovery and transforming the NHS. The 3.4% growth in funding only represents a return to the long-term average of funding the NHS since 1948. There was a 4% annual average increase in real terms between 1948 and 2010, which reduced to 1.4% between 2010 and 2018. Since 1948, annual demand/cost has risen by between 3.5% and 4.5%.”
Workforce risks needing to be addressed include resolving high numbers of nursing and GP vacancies, supply uncertainties (both domestic and international, with the latter impacted by Brexit and immigration policy) and the resulting pressure on existing staff which in turn is impacting on existing staff morale and retention. The finalised national workforce plan is a vital piece of this jigsaw, as are the resolution of complex divisions in workforce responsibilities and initiatives to spread healthcare demand across other parts of the system and reduce pressure on A&E Departments, etc (eg increased capacity and use of pharmacists and the 111 service).
Treece concluded: “Further opportunities to improve patient care and drive efficiencies in operation will arise from the smarter use of data and increased digitisation of services. These are essential for the future of the sector. However, these benefits will need to be balanced with ensuring strong levels of personal data and cyber security and ensuring that those at the ‘sharp end’ of delivering healthcare have the ability and resource required to implement digitisation locally in an effective and optimal manner.”
Kathryn McCloghrie CMIRM, head of corporate strategy at Sellafield Ltd and chair of the IRM’s Nuclear Industry Special Interest Group, commented: “The growing importance of climate change is a big opportunity for the nuclear industry. After a long period of public reluctance, nuclear could have a renaissance as the stable baseload element within a green energy mix. The window of opportunity is narrow, with only one new build currently in construction and older stations coming towards the end of their operational lifetimes. The Government’s ongoing work on developing the Regulated Asset Base as an alternative funding model for new nuclear power stations may create a change in context which nuclear operators could exploit. Development of small modular reactors and advanced nuclear technologies could bring new models and new markets for the industry. Application of traditional nuclear skills and knowledge into new technologies, such as carbon capture or hydrogen, are also opportunities.”
With a decommissioning focus, the increasing focus on environmental remediation brings an increased interest in site end states and potential for re-use of sites. This is a complex blend of opportunity and threat, challenging operators to ‘get the right balance’ between public expectations, regulatory requirements, re-use benefits and cost-effectiveness. The level of remediation and corresponding level of ongoing institutional control will vary by site. One size will certainly not fit all.
“Developments in technology, for example robotics and automation, could provide a significant opportunity for increasing the amount of remote operations, with safety, security and cost benefits. Working closely with technology developers could enable early development which is suitable for nuclear operations. Effective digitisation of business processes will also bring benefits which will need to be managed with the increased burden on cyber security.”
Skills remains a key topic, as they do for many sectors. With our focus on the long-term and significant dependence on science, technology, engineering and mathematics, the nuclear industry will be seeking talent among some areas of scarcity. Appropriate investment in education and development, both internally and with partner organisations, could be a significant risk mitigator. Bringing more diversity into the industry is a key opportunity, appropriately balancing the value of experience and knowledge with new ideas and different ways of thinking.
“Supply chain capability and capacity are a key focus. Delivery of major projects and programmes is always challenging and depends on the skills and expertise of major suppliers. Recent learning from other challenging projects reminds us how difficult it is to adequately forecast project out-turns when dealing with complex long-term requirements. Working effectively with suppliers to maximise the collective capability and ensure incentives are aligned is critical. Understanding the stakeholder landscape will also be important for project success. As is the case with many large infrastructure investments, stakeholder expectations are diverse and evolving. Managing the project success criteria to maximise perceived value without damaging scope creep will require early work to obtain an effective understanding of the wider risks from the programme and context.”
Change management is the other driver of risk. “Many of our nuclear sites are undergoing significant mission changes, ramping up construction, moving into de-fuelling, post-operational clean-out or care and maintenance. Organisations will be changing the way they operate, moving between routine processes and more dynamic balancing of risks and priorities. For many, the risks associated with the cost-effective management of ageing assets will be key. Times of change are hard for people, bringing threats and opportunities. Supporting our workforces through change is an important element of maintaining an unrelenting focus on safety and security throughout.”