The approaching start date for the Australian Prudential Regulation Authority’s CPS 230 means operational risk management changes are coming for financial institutions. In light of these changes, firms must understand and implement the proper steps to avoid non-compliance and the risks and outcomes that it carries. Let’s delve into these changes in greater detail and flesh out what effective operational risk management looks like.
A more comprehensive approach to operational risk management
The introduction of CPS 230 signifies a shift towards a more comprehensive approach to identifying and assessing risks within financial institutions. Under this prudential standard, regulated entities must strengthen their operational risk management frameworks to ensure they are wide-reaching and effective. This includes any risks posed by material service providers or any other third-party used by financial services.
Operational risks encompass many potential threats, including disruptions to critical operations, cybersecurity breaches, compliance failures, and system failures. By adopting this new approach to operational risk management, financial institutions can better anticipate, mitigate, and respond to these risks — enhancing their resilience and safeguarding operational integrity.
A greater focus on accountability and responsibility
CPS 230 also places a greater emphasis on accountability and responsibility within financial institutions. Senior management and boards of directors must oversee the institution’s operational risk management framework and ensure it is adequate and effective.
Effective governance structures, clear lines of accountability, and transparent reporting mechanisms are essential for fostering a culture of accountability and responsibility. By following these steps, financial institutions can enhance their risk management capabilities and mitigate the potential for failure.
Integration of technology and innovation into operational risk management
Technology and innovation play a crucial role in operational risk management under CPS 230. Financial institutions are encouraged to leverage technology solutions to enhance their ability to effectively identify, assess, and mitigate operational risks.
Advanced analytics, artificial intelligence, and machine learning can provide valuable insights into emerging risks and trends, enabling financial institutions to proactively mitigate potential threats. Additionally, innovative technologies like cloud computing can enhance the resilience and security of critical operations, reducing the risk of disruptions and breaches.
Increased emphasis on resilience and continuity of services and operations
CPS 230 introduces new requirements for enhancing the resilience and continuity of services and operations within financial institutions. Regulated entities must develop robust business continuity plans to ensure they can continue operating in the event of disruptions or emergencies.
Effective business continuity management involves identifying critical operations, assessing their vulnerability to disruptions, and implementing measures to mitigate potential impacts. By enhancing their resilience and continuity capabilities, financial institutions can minimise the risk of operational failures and ensure they can maintain essential services for their customers and stakeholders.
The risks of non-compliance
Non-compliance with CPS 230 operational risk management requirements can have severe consequences for financial institutions. Some of these include:
Sanctions and fines:
APRA has the authority to impose sanctions and fines on entities that fail to comply with CPS 230 requirements. These penalties can be substantial and can significantly impact your financial institution’s reputation and bottom line.
Reputational damage:
Non-compliance with operational risk management requirements can damage your financial institution’s reputation and erode trust among customers, investors, and other stakeholders. This can have long-lasting consequences and negatively impact your institution’s ability to attract and retain customers and investors.
Increased operational risk exposure:
It’s simple, and it’s true — failing to manage operational risks effectively can increase the likelihood of operational failures, disruptions, and losses. Failing to comply with the regulations exposes your institution to greater operational risk, which can impact financial stability and resilience.
Business continuity risks:
Non-compliance with business continuity requirements can leave your financial institution vulnerable to disruptions and emergencies, potentially leading to significant financial losses and reputational damage.
Competitive disadvantage:
Financial institutions that fail to comply with CPS 230 operational risk management requirements may find themselves at a competitive disadvantage compared to their peers. Customers, investors, and regulators increasingly prioritise operational resilience and risk management capabilities, and institutions that fail to meet these expectations may struggle to remain competitive in the marketplace.
Restricted market access:
Regulators may impose restrictions on financial institutions that fail to comply with CPS 230 requirements, including limitations on their ability to operate in certain markets or offer specific products or services. This can limit your institution’s growth prospects and revenue potential and can negatively impact your long-term viability.
The time to change is now
CPS 230 operational risk management changes do represent a significant shift in regulatory expectations for financial institutions. These changes will provide a better framework for institutions at the highest risk from cybersecurity threats and keep their customer’s money safe. However, institutions should act now to ensure they comply with the new regulations 1 July 2025 start date.
By embracing these changes and implementing robust operational risk management frameworks and material service provider management structures, financial institutions can enhance their resilience, safeguard their operational integrity, and mitigate the potential risks of non-compliance.
For more on how automated solutions and AI can help your institution comply with new regulations, check out our APRA CPS 230 hub, or get in touch with us for a personalised demo.
