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In recent years, managing operational risk has become a major concern for the superannuation, insurance, and banking industries. Unstable market conditions and new emerging risks have heightened the importance of this issue. To address these challenges, the Australian Prudential Regulation Authority (APRA) introduced the CPS 230, a cross-industry Prudential Standard. This new standard aims to strengthen the management of operational risk and reduce the impact of disruptions on customers and the financial system, providing a solid framework for these industries.
However, implementing CPS 230 comes with its own set of challenges. Organisations must navigate a complex landscape to meet all the requirements of this standard. In this blog, we will discuss six common pitfalls that organisations face when implementing CPS 230 and offer practical strategies to avoid them.
An Overview of APRA CPS 230
Australian Prudential Regulation Authority (APRA) released a new cross-industry Prudential Standard CPS 230 Operational Risk Management (CPS 230) in July 2023 to strengthen the management of operational risk in financial industries and minimise the impact of disruptions to customers and the financial system.
CPS 230 sets forth minimum standards and regulatory requirements that APRA-regulated entities must adhere to mitigate and manage operational risks effectively and ensure the uninterrupted continuity of their business operations within acceptable parameters. It also encompasses guidelines for overseeing third and fourth-party risks, outlines procedures for ending pre-existing contractual agreements, and mandates the reporting of material operational risks to APRA.
The CPS 230 will replace five existing standards: Prudential Standard CPS 231 Outsourcing, Prudential Standard CPS 232 Business Continuity Management and the equivalent superannuation and health insurance standards (SPS and HPS).
APRA CPS 230 Requirements
Here’s a simpler breakdown of APRA’s CPS230 key requirements:
Risk Assessment and Response Preparedness
Financial institutions need to have strong systems to spot, evaluate, and manage risks. These risks can come from faulty internal processes, system failures, human mistakes, or external events. Institutions should have plans in place to reduce risks and respond effectively to incidents, keeping operations smooth and stable.
Building Resilience
Institutions must be able to keep their essential functions running even during crises. This means setting acceptable limits for disruptions and having strategies to stay within these limits. Organisations are required to plan for business continuity, have effective disaster recovery plans, and regularly test these plans to make sure they work. Being resilient helps institutions handle emergencies and continue to serve customers and meet obligations, even during disasters.
Service Provider Risk Management
Financial institutions need to manage risks linked to third-party and fourth-party service providers. This involves carefully choosing providers, constantly checking their performance, and having backup plans in case these providers fail. Institutions must understand how much they rely on these providers and the potential impact on their operations, ensuring that service disruptions don’t harm their business continuity. Effective management of these relationships is crucial for maintaining smooth operations.
Uplift Governance Framework
A strong governance framework is key to better risk management. CPS 230 requires financial institutions to clearly define who is responsible for risk management at all levels, from the board to senior management to risk functions. This includes setting clear roles and reporting lines. Institutions need to make sure risk management is a part of every aspect of their operations, creating a culture where everyone is aware of and actively managing risks.
Navigating the Common Pitfalls in CPS 230 Implementation
Implementing the APRA CPS 230 standard can be challenging, and there are several common pitfalls that organisations may encounter. Here’s a detailed look at these issues and how to overcome them:
Poor Documentation and Record-Keeping
A major issue is not having clear documentation and records. Without detailed process maps and documented procedures, identifying risks becomes difficult. This lack of clarity can lead to missed vulnerabilities and ineffective risk management. To fix this, organisations should create detailed process maps outlining every step of their operations. These documents need regular updates to stay current and accurate. This practice helps identify potential issues and apply the right mitigation strategies, ensuring smooth CPS 230 implementation.
Inconsistent Implementation of Risk Management Practices
Another common problem is the inconsistent application of risk management practices across different departments or teams. This inconsistency can create gaps in the risk management framework, leaving the organisation exposed. To address this, establish standardised risk management practices and ensure they are uniformly applied throughout the organisation. This involves setting clear guidelines, using templates, and conducting regular audits to ensure compliance.
Insufficient Training and Awareness
A well-documented plan will also not deliver if the staff is not trained properly. Lack of training and awareness among employees can lead to confusion and non-compliance with CPS 230 requirements. Organisations must invest in comprehensive training programs to educate their staff about their roles and responsibilities in risk management. Regular training sessions and updates on the latest risk management practices help maintain a high level of awareness and preparedness among employees.
Overlooking Business Continuity Plan’s Availability and Accessibility
Even a well-thought, latest Business Continuity Plan doesn’t deliver the required result if it is not available to the right stakeholders at the right time. When plans and critical information are scattered across different departments, it can cause inefficiencies and delays due to resourcing or technology. To fix this, ensure that business continuity plans are centrally stored and easily accessible to all relevant stakeholders. A centralised approach helps in quick decision-making and efficient execution of continuity plans during emergencies.
Overlooking Evidence Gathering for Audits
Failing to gather necessary evidence can lead to a big problem at the time of auditing. To prevent this, establish a robust tool like PRIME BPM to ensure that all relevant data, such as who performed the process, how long the process took and who executed each of those tasks, is systematically recorded and stored, making it readily available as evidence for audit purposes.
Lack of Continual Monitoring and Reporting
Many organisations implement and then forget to maintain continual monitoring and reporting of their risk management processes. Without ongoing oversight, it’s challenging to identify emerging risks and ensure that risk management strategies remain effective. Implementing a continuous monitoring system and regular reporting mechanisms helps keep track of risks and ensures timely updates to risk management practices.
How PRIME BPM Helps Mitigate Common CPS 230 Pitfalls
The above pitfalls are common that every organisation may face while implementing APRA’s CPS 230. However, PRIME BPM can help overcome these challenges effectively.
PRIME BPM provides a complete solution that meets the key requirements of CPS230, from improving risk assessment and response readiness to simplifying business continuity management and overseeing service providers.
With PRIME BPM, you can quickly and easily create accurate process maps and connect them to risk on a task-by-task basis. By offering a centralised platform for documenting processes, managing risks, and ensuring compliance, PRIME BPM helps organisations avoid common pitfalls and successfully implement CPS230.
Its integrated tools, like the Risk Module and Operational Intelligence Module, help organisations maintain strong risk management frameworks, clarify roles and responsibilities, and streamline audit processes. In the end, PRIME BPM is a valuable partner in navigating CPS230, helping organisations boost operational resilience, ensure compliance, and manage risks effectively.
To know more about how PRIME BPM can help you effectively meet CPS 230 compliance requirements, you can watch the 5-minute video.