Risk negation is all about business continuity. Can firms continue to operate under difficult circumstances? Evaluation of financial risk is usually a straightforward business management task, and common practice. However, assessing non-financial risk can be more complicated as the potential issues are wide-ranging.
A quick Google search on the definition of non-financial risk outlines threats to a firm’s reputation including: IT security, operational or regulatory risk, environmental or social governance. However, the accuracy of customer data is not mentioned.
The challenge in the financial services industry is that data underpins everything. It is fundamental to business management, forecasting, and delivery. Data accuracy is crucial to operations, and any inaccuracy can have significant consequences, ultimately resulting in financial over-exposure.
Let’s take DB pensions as an example. These days, due to the huge cost to PLCs, employees are rarely lucky enough to be invested in a final salary pension scheme. However, there are plenty of historical schemes in existence, currently paying out, or due to pay out in the near future. The pensions problem is that financial firms need to reserve cash to meet liabilities. And the sums required are sizable. A final salary pension scheme which pays out £50k in perpetuity until death, would need half a million pounds reserved over ten years. This is a significant liability.
However, not all policies are realized because some recipients pass away before claiming their final salary pension. Yet, if unaware of the death, firms still reserve liability for customers who are no longer responding to their communications.
Where a book of policy holders’ ages does not match life expectancy, firms usually understand there is an issue. While firms are strong on statistical analysis, and actuarial calculations in order to identify a pensions problem, they are often not experts in customer tracing as it is a niche field. Efforts to locate customers commonly involve credit agencies or the DWP letter forwarding service, although these enquiries are often unsuccessful and it remains challenging to determine the whereabouts of some customers.
What was a non-financial risk relating to inaccurate customer data is then treated as a financial risk. Firms understandably jump to the worst-case scenario to ensure they have the reserves available to cover these liabilities. This often runs into the need to set aside vast quantities of cash for policyholders who are already deceased.
There is another solution. At Estatetrace our enhanced tracing service is readily available and can provide answers. With a high success record, we specialise in tracking down missing customers. We use a combination of digital and human intervention processes, to help banks, building societies, pension providers and other financial industry clients maintain the integrity of their databases. This includes identifying deceased customers and locating the current details for ‘gone away’ customers, or those who legally represent them after their death, or loss of mental capacity.
There is clear regulation surrounding customer data. Yet, it is fairly uncommon for firms to be fined for breaches of accuracy. Instead, inaccuracy has resulted in organsiations needing to reserve substantial cash reserves to meet potential liabilities – arguably becoming more of a millstone around the neck than any fine.
Freeing up these funds for just one liability would pay back the low cost of enhanced tracing services multiple times over. Enhanced tracing can ensure data accuracy and therefore eliminate a non-financial risk and solve the pensions problem at the same time.