It’s next to impossible to run a company without risks. Every day, your business faces operational risks, both internal and external, which can lead to financial and other losses.
Having a Risk and Control Self-Assessment (RCSA) framework in place is the only way to prevent or reduce those risks.
Conducting an RCSA is the key to a company’s overall risk management strategy, and it plays a crucial role in identifying, assessing, managing, and risk mitigation across all organizational levels.
What is RCSA?
Risk and Control Self-Assessment (RCSA) is a procedure organizations use to assess and examine potential operational risks and the effectiveness of their risk management protocols and practices.
Operational risks can be both internal and external and can include:
People Risks
Whether it’s the loss of key personnel, fraud, or simple human error, working with people carries an inherent risk you must be ready for.
This risk mainly stems from inadequate management, supervision, or training.
Process Risks
Having clearly defined processes is often the key to a successful business. However, if those processes are inefficient or non-existent, they inevitably lead to losses.
Technology and System Risks
Risks don’t have to come from people or processes. Those two might work fine, but it won’t matter much if the technology or your system fails you.
Hackers are looking for a weakness in your system and IT to initiate cyber-attacks and cause data breaches to disrupt your business operations and steal sensitive data.
Financial Risks
Of course, all of these risks can, ultimately, be considered financial risks. However, specific financial risks include the company’s liquidity, credit health and rating, and market movement.
Security Risks
Operational risks can also be physical. Just like a cyber attacker can cause an online breach to steal data, someone can also conduct a physical breach or theft and cause significant damage and loss.
Supply Chain Risks
Supply chain, vendor, or third-party risks are another category of operational risks your business has to contend with almost daily. It’s vital to conduct third-party risk assessments regularly and choose an effective TPRM framework.
Delays in the supply chain, supplier failures, and even demand changes, such as a sudden increase or drip and other similar risks, can all impact your business operations.
Compliance and Regulatory Risks
Failure to comply with legal and regulatory requirements or contractual obligations can result in legal fines, financial penalties, loss of reputation, and even a ban on conducting business in the worst cases.
The RCSA framework isn’t only one employee’s (like a data protection officer) obligation, nor of one department (like HR or legal). Instead, it is something that everyone in the organization needs to take part in and work together on.
Is RCSA a Regulatory Requirement?
While the GDPR, LGPD, CPRA, PIPEDA, or other data privacy regulations do not explicitly mention or require RCSA, it’s still important to remember that these regulations seek a proactive approach from organizations regarding data protection.
EU’s GDPR requires businesses to conduct a regular Data Protection Impact Assessment (DPIA) to identify and minimize the risks to the data they’re handling.
In particular, Article 35 of GDPR says that DPIA must contain at least:
- A description and purpose of the processing operation
- An assessment of the necessity and proportionality of the processing in relation to the purposes
- An evaluation of the risks to the rights and freedoms of data subjects
- Measures the company will take to address these risks
Note: Here are some examples of what an effective GDPR DPIA should look like.
The CPRA also does not explicitly mention RCSA. However, the California Privacy Protection Agency, the regulatory body in charge of supervising CPRA, created a risk assessment regulation draft on 8th September 2023.
While some parts of this draft are open to Board discussion or consideration, we have minimum risk assessment requirements. These are:
- A summary of the processing that presents a significant risk to consumers’ privacy
- The categories of personal information to be processed
- The context of the processing activity
- The consumers’ reasonable expectations concerning the purpose for processing their personal information or the purpose’s compatibility with the context in which their data was collected
- The operational elements of the processing
- The purpose of processing consumers’ personal information
- The benefits resulting from the processing to the business, the consumer, other stakeholders, and the public
- The negative impacts on consumers’ privacy associated with the processing, including the sources of these negative impacts
- The safeguards that the business plans to implement to address the negative impacts
What is the Life Cycle of RCSA?
The Life Cycle of RCSA involves determining the application and scope, roles & responsibilities involved in risk assessment, and timing and frequency for conducting these assessments based on their specific operational needs. Let’s dive into more details.
RCSA Fundamentals
No two companies face the same operational risks, so there can’t be a one-size-fits-all approach to risk management. Because of this, organizations must identify and compare different options and select the framework that will work depending on their unique needs, nature, scope, and intricacies.
In this early stage, organizations have to decide on three things:
1. Application and scope
For smaller businesses, all operational risks can be subject to the RCSA. However, as an organization grows and faces more and more risks (sometimes numbering in the 1000s), this approach becomes time-consuming, expensive, and impractical.
Instead, there are three alternative options as an organization grows (and its operational risks).
These are:
- Categorising operational risks based on their level
- Focusing on operational risks that affect the completion of specific department or function objectives and goals
- Focusing on operational risks that affect the completion of the organization’s objectives as a whole
2. Focus
RCSAs can concentrate on a process or an event.
The advantage of process-based RCSA is that they can better align the organization’s day-to-day operations with their risk management. However, the downside of this approach is that it can be time-consuming.
The other approach, event-based RCSA, is more common. The RCSA is performed for specific risk events (i.e., cyberattacks, natural hazards, fraud, etc.)
3. Roles & responsibilities
The (operational) risk function is responsible for designing and overseeing the RCSA, including documenting the process, training, workshops, etc.
Besides, the process has five more roles, each with its own responsibilities.
- The governing body ensures all system and internal controls are in place.
- Senior management supports the work of the board
- The risk owner ensures that the RCSAs are completed
- Control owner designs, implements, and maintains risk controls. They also provide vital information to risk owners on control weaknesses and gaps
- Data owner provides data to risk and control owners they need to conduct an RCSA
4. Timing & frequency
Finally, an organization has to determine the timing and frequency in which they will perform RCSAs. This largely depends on the frequency of the operational risks they are facing.
The RCSAs need to be reviewed and updated regularly. This is usually yearly for most companies, but a monthly review might be necessary for some.
RCSA Design
Once all the fundamentals are in place, it’s time to design the RCSA template. Most organizations use a spreadsheet approach before moving to a system-based approach.
Whichever of the two your company opts for, your RCSA should have the following elements:
- A risk matrix
This is typically a 3×3, 4×4, or 5×5 table with risk probability (rare to frequent) on one side and impact (low to high) on the other, and it looks like this:
Probability Impact 1 Rare Low 2 Possible Medium 3 Frequent High
- Inherent risk exposure
An inherent risk exposure represents the level of risk if there are no risk controls in place. This is used as a baseline for a specific risk.
- Net risk
The net risk is the level of risk exposure when risk controls are in place.
- Cause and effect
Events don’t happen in a vacuum. Instead, they are caused by something. This can be a single or multiple factor.
As such, an RCSA should also include information on what caused a particular event (i.e., “event X was caused by Y”).
Similarly, events can also have different effects and impact, which should also be included in the RCSA (for example, “event A led to business disruption”)
- Control effectiveness
Control effectiveness can be measured on an individual and overall level, although you’ll rarely see only one control for all operational risks for the organization.
Typically, the control effectiveness can be determined subjectively or objectively. The subjective approach can be as simple as an “effective – ineffective” scale or a “needs improvement – adequate – excellent” scale.
The objective assessment uses “key control indicators” that the organization previously determined.
- Action plan
Finally, an RCSA must have an action plan on what to do with all the information you collect. These actions must be SMART (Specific, Measurable, Achievable, Realistic, and Timely).
What are the 3 Lines of Defense in Risk Management?
The “Three Lines of Defense,” or the 3LD model, is a framework for identifying and managing risks and exercising organizational control. This model was originally published by the Institute of Internal Auditors (IIA) in January 2013, and it consists of three layers of defense:
First layer
The first layer of defense is the unit or business function that conducts the activity, and its role is to ensure an effective control environment, implement relevant risk management policies, and execute internal controls in the business unit.
Second layer
The second layer is the risk management and compliance function. They monitor the first layer and oversee the organization’s overall risk management implementation.
Third layer
This layer represents internal and external auditors, whose “job” is to ensure the effectiveness of the first two layers and evaluate the implementation of risk management.
How is RCSA Performed?
The RCSA consists of 10 steps:
1. Defining the scope and objective
Before beginning the RCSA, we must determine the risk categories, processes, or departments and outline what the RCSA needs to do (for instance, identify risks or determine the control effectiveness).
2. Engaging stakeholders
In this step, we identify key stakeholders (i.e., risk and control owners) and communicate the RCSA purpose and benefits to them.
3. Gathering and reviewing data
We also need to gather and review relevant data. This can be from audit and incident reports or previous RCSAs.
4. Identifying and categorizing risks
Next, we have to identify potential risks. This is usually done via interviews, brainstorming, and workshops.
We also need to categorize risks. Categorizing risks helps a great deal in managing and assessing them. For example, artificial intelligence is an ever-growing risk for businesses, prompting the European Union to create the EU AI Act and designate AI into four risk categories: prohibited, high, limited, and minimal risk.
- Determining inherent risks
As we previously explained, an inherent risk is the level of risk without control measures in place, and these need to be evaluated individually for their impact.
- Control evaluation
Each control for individual risk should be identified, and its effectiveness in reducing the relevant risk should be appraised.
- Assessing residual risks
Residual risks are those risks that remain after controls are implemented. These risks also need assessing to prioritize risks that require extra attention.
- Planning corrective action
In this step, we must identify critical gaps and weaknesses in specific areas and develop a SMART action plan to alleviate risks and improve controls.
- Documenting and reporting to stakeholders
The RCSA process or framework should be implemented top-to-bottom, including its findings and action report. This must be reported to the relevant stakeholders, such as decision-makers and the senior management.
- Implementing actions and reviewing
Finally, an RCSA won’t matter much if you don’t implement its recommended actions and follow through. You also need to regularly review and update your RCSA process to address emerging risks, market and industry changes, or the effectiveness of your actions.
What are the Best Practices for RCSA?
The RCSA is a complex process. However, there are a few best practices that you can follow to ensure its effectiveness. Here are three:
- Communicate with relevant stakeholders.
You should first identify relevant stakeholders, including control and risk owners, and ensure they understand their role in the process.
The RCSA will depend on effective communication with stakeholders, who must understand this process’s importance, objectives, and expected outcomes.
- Integrating the RCSA into the risk management framework
The RCSA process has to be integrated into the organization’s broader risk management framework. It shouldn’t be viewed as an isolated process.
According to the Institute of Risk Management (IRM), this means linking to internal and external loss data which support the assessment and validate the control effectiveness and residual risk, analyzing different scenarios when assessing risks, reporting RCSA results, and recommending an action plan for every exposure (accept, mitigate, transfer, avoid).
- Improve and update the RCSA process
Finally, the RCSA process is never truly finished, and you must review and update it regularly to ensure it remains relevant and up-to-date.
Frequently Asked Questions (FAQs)
What is the RCSA risk and control self-assessment framework?
Risk and Control Self-Assessment (RCSA) is a procedure organizations use to assess and examine potential operational risks and the effectiveness of their risk management protocols and practices.
It consists of:
- Defining the scope and objective
- Engaging and communicating with relevant stakeholders
- Gathering and reviewing data
- Identifying and categorizing risks
- Identifying inherent risks
- Control evaluation
- Determining residual risks
- Planning and recommending corrective actions
- Documenting RCSA and reporting to stakeholders
- Implementing actions and reviewing the RCSA
What is the RCSA strategy?
The RCSA strategy is a business process that determines and examines operational risks and their risk control and management practices and protocols.
What is an example of RCSA?
An RCSA, for example, for a financial institution, such as a bank, would look like this:
Identifying Risks
- Credit risks (the borrower could default on their loan obligations)
- Market risks (increasing market prices could result in financial risks)
- Operational risks (untrained personnel, inadequate processes, or other risks can lead to risk of loss)
- Compliance risks (failure to comply with regulations can result in fines and penalties
Assessing Risks
- Credit risks (high probability, high impact)
- Market risks (medium likelihood, high potential impact)
- Operational risks (low probability, high impact)
- Compliance risks (medium likelihood, high impact)
Control evaluation
- Credit risk controls (implement strong and regular credit review procedures, more rigorous policies, and diversify the loan portfolio)
- Market risk controls (use hedging instruments and limit position sizes)
- Operational risk controls (implement more robust IT security measures, regular audits, and employee education and training programs)
- Compliance risk controls (create a comprehensive compliance framework, regular internal audits, and compliance training
Action plans
- Credit risks (increase bad debt provisions, introduce more early warning indicators, and improve credit monitoring)
- Market risks (perform stress testing more regularly)
- Operational risks (automate risk control and management processes and improve disaster recovery protocols)
- Compliance risks (update current compliance frameworks and training programs and ensure their adherence to regulations)
What does a good RCSA look like?
A good RCSA should identify operational risks the organization faces, effectively communicate with stakeholders, and recommend SMART corrective actions that the organization can follow through on.
How Can Captain Compliance Help You?
Do you need help evaluating and mitigating the operational risks your business is facing? Captain Compliance data privacy and compliance experts are ready for your call.