Fiduciary Examination Preparedness: Focus on Risk
As the world has surpassed one year of the primarily remote work environment, financial institutions are increasingly more familiar with the technologically based audit and examination process. With any new method comes a new set of challenges, which also brings about shifts in focus. For the world of fiduciary administration, though the process of review may look different, documentation of oversight and strength of your controls remains the most integral part of successfully completing any independent review.
Defining Your Oversight
On February 26, 2021, the Federal Reserve Board published a revised Supervisory Letter SR 96-10, Risk-Focused Fiduciary Examinations. The revision included a clarification on the responsibilities of the board of directors in accordance with its Board Effectiveness Guidance released at the same time. These publications seek to provide clarity on the supervisory expectations for boards and provide five key attributes that effective boards follow. In application to fiduciary activities, this revision provides the more defined requirement for regular reporting to the board as well as the necessity of the board’s regular involvement in strategic decision making in fiduciary practices.
Risk assessments are the best tool to define and monitor your practices. The risk assessment of your fiduciary activities should include consideration for the size and number of accounts administered, the nature and complexity of those accounts, the capacity of management and staffing to adequately administer the portfolio, and the capability of your systems and processes to provide sufficient service to clients. An effective risk assessment will clearly define your program and create a meaningful tool to align the fiduciary practices with your institution’s strategic plan.
A key part of examination preparation is the relationship with your independent review provider. A focus on fiduciary activity review can strengthen your lines of defense. Understanding the procedures and scope performed by an independent reviewer, assessing the sufficiency of the size of the scope, and allowing your independent provider to truly serve as a third line of defense are crucial in being able to evidence a process that effectively identifies areas of weakness in operational and administrative controls.
Establishing documentation and updating the valuation of unique and hard-to-value assets continue to appear as a topic of focus. Your annual administrative reviews should mention any assets for which values are manually assigned. Management should assess whether your team of professionals continues to maintain the level of expertise required to manage and accurately value those assets. The review also should consider whether trusts whose asset mix is largely manually valued assets still align with the fiduciary function’s strategic direction. Lastly, a detailed policy that indicates the acceptable frequency for valuation can provide a guideline for evidencing proper due diligence in providing your clients with the most accurate information regarding assets you manage.
Vendor management controls should be established and assessed annually. Documenting your understanding of third-party risk specific to each vendor reflects your oversight capacity. Developing a partnership relationship with your vendors can allow you to better demonstrate your understanding of the risk their services potentially pose. A partnership with your vendors also cultivates an ability to identify problems or inefficiencies early. This enables your management and board to make decisions before they begin to affect external factors and, as a result, client service. While technological advancement is a necessity to remain relevant in the financial services industry, having robust processes in place that identify and mitigate risk is key to resilient technological integration.
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