Adopting a Trust by Design approach could help organizations move forward, by balancing upside risk and downside risk to create a more complete view of the organization and where it could go.
Advanced risk intelligence can actually streamline and enhance key touch points, such as opening accounts or applying for mortgage loans. And by enabling business transformation through agile practices, risk functions can help companies make decisions quicker and actually improve effectiveness and efficiency to keep up with — and even stay ahead of — customer expectations, both internal and external.
The same principles apply to innovation cycles. Firms need to move more quickly in driving change, without increasing risk exposures. By embedding risk management into new product development, for instance, they can design offerings with known risks in mind, shorten review and approval timelines, and ultimately get products into market sooner. Plus, products should be designed with long-term monitoring in mind.
The underlying platform to successfully enable this change requires adoption of more effective data intelligence frameworks and more advanced architectures for automation of these capabilities. To do so, they will need a robust foundational platform that integrates with a broader governance, risk and compliance ecosystem. Such platforms can enable more automated risk monitoring and support stronger data models for improved business intelligence and decision-making.
By digitalizing and embedding these key risk management capabilities across the customer and product lifecycle, the 3LoD have not been replaced, they have been strengthened. This new risk management platform allows these capabilities to be deployed and considered early and often, allowing for the traditional second and third-line functions to execute on their independent remits using a single source of the truth and avoiding repeated work. At the same time, the principle of front line ownership of risk is reinforced and evidenced throughout the lifecycle of the business.
The future of 3LoD
Conceptually, the principles of 3LoD are here to stay, but they will be reengineered to be activities-based, adaptive and real-time. People remain part of the solution, but the balance will shift toward reliance on process and technology, and organizational boundaries will be redrawn to ensure lines of defense don’t remain walled-in siloes. In fact, the 3LoD will extend beyond the siloes of the enterprise to encompass the entire ecosystem of alliances and partners.
With increasing automation or built-in checks and balances in 1LoD, 2LoD can develop a robust assurance framework designed to ensure that bots and algorithms are secure and operating as designed.
3LoD will still be needed, but it will now be more forward-looking –where 3LoD used to focus on what went wrong in the past, it will act as prophets of the organization, identifying future opportunities and threats. Boards want this, and some internal audit departments are becoming more relevant to the board by providing such insights.
Adopting a Trust by Design approach could help organizations move forward, by balancing upside risk and downside risk to create a more complete view of the organization and where it could go. An organization that can navigate through uncertainty is one that creates trust and long-term value while it transforms. Customers and regulators alike look for stable, trustworthy organizations – but by being backward-looking, many organizations are missing these opportunities.
Forward-looking risk is fundamental to the future of 3LoD, whatever form it takes.
Summary
Digitalization is an increasingly significant theme in the development of the Three Lines of Defense risk management model. While conceptually the model will remain the same, the roles of each line are being re-engineered. There is a choice of models that organizations could consider adopting, but with consistent principles – being forward-looking and adding value for customers.
