Author: James Borley, Director of Payment Services
As the UK payments sector continues to grow and evolve, firms are facing increasing regulatory expectations, heightened financial crime risks, greater reliance on technology and more complex operational environments. Against this backdrop, effective risk management is no longer simply a compliance requirement. It is a fundamental component of good governance and sustainable business growth.
For Payment Institutions (PIs) and Electronic Money Institutions (EMIs), the Financial Conduct Authority (FCA) expects firms to maintain robust governance arrangements, effective risk management frameworks and adequate internal controls. While many firms have traditionally viewed Risk as a second-line control function, forward-thinking organisations increasingly recognise it as a strategic enabler that supports informed decision-making, protects customers and strengthens operational resilience.
The Regulatory Expectation
The FCA’s Principles for Businesses require firms to conduct their affairs with due skill, care and diligence and to organise and control their businesses responsibly and effectively. These expectations are reinforced through the Payment Services Regulations, Electronic Money Regulations, Operational Resilience requirements and financial crime obligations under the Money Laundering Regulations.
From a regulator’s perspective, a firm’s Risk function should provide assurance that material risks have been identified, assessed, monitored and appropriately mitigated. Regulators increasingly expect Boards and Senior Management to demonstrate a clear understanding of the risks facing their business and how those risks are managed within established risk appetite parameters.
Weak risk management frameworks are often at the heart of regulatory findings. Issues relating to safeguarding, operational resilience, outsourcing, financial crime and governance frequently stem from inadequate risk identification, poor escalation processes or ineffective oversight.
The Role of the Risk Function
At its core, the Risk function exists to support the achievement of business objectives while ensuring risks remain within acceptable levels.
An effective Risk function should:
- Support the identification and assessment of material risks;
- Establish and maintain an Enterprise Risk Management Framework;
- Develop risk policies and methodologies;
- Monitor risk exposures against agreed appetite;
- Provide independent challenge to the business;
- Report emerging risks to Senior Management and the Board; and
- Promote a strong risk culture across the organisation.
Importantly, Risk should not be seen as a silo department that prevents innovation or commercial growth. Its role is to facilitate informed decision-making, enabling firms to pursue opportunities with a clear understanding of associated risks and controls.
Understanding the BWRA and EWRA
A common area of confusion within payments firms is the distinction between the Business-Wide Risk Assessment (BWRA) and the Enterprise-Wide Risk Assessment (EWRA).
While both are critical components of a firm’s control framework, they serve different purposes.
Business-Wide Risk Assessment (BWRA)
The BWRA is primarily focused on financial crime risks and is required under the Money Laundering Regulations.
Its purpose is to identify and assess the money laundering, terrorist financing, sanctions and fraud risks to which the firm is exposed. The assessment should consider factors such as:
- Customer types;
- Products and services;
- Delivery channels;
- Geographic exposure;
- Transaction activity;
- Agents and distributors (if applicable);
- Third-party relationships.
The BWRA should not be viewed as a static compliance document. It should drive the firm’s financial crime framework by informing customer risk-rating methodologies, due diligence requirements, transaction monitoring controls and staff training.
One of the most common regulatory failings is where firms complete a BWRA document but fail to demonstrate how its conclusions influence their control environment.
Enterprise-Wide Risk Assessment (EWRA)
The EWRA is, by definition, significantly broader and provides a holistic assessment of all material risks facing the organisation.
In addition to financial crime, it typically considers:
- Operational risk;
- Cyber (IT & Security) risk;
- Conduct risk;
- Prudential risk;
- Strategic risk;
- Reputational risk;
- Outsourcing and third-party risk; and
- Regulatory risk.
The EWRA enables the Board and Senior Management to understand the firm’s overall risk profile, establish risk appetite and determine whether key risks are being managed effectively.
In practice, the BWRA should form part of the wider EWRA. Financial crime is one of several enterprise risks, and the outputs of the BWRA should feed directly into the firm’s broader risk assessment and governance processes.
Simply put, the BWRA tells a firm how vulnerable it is to financial crime, while the EWRA tells the Board how vulnerable the business is overall.
What Good Looks Like
While every firm’s risk framework will differ depending on its size and complexity, there are several characteristics consistently associated with effective risk management.
Clear Governance and Accountability
Effective risk management begins with strong governance. The Board retains ultimate responsibility for risk oversight, supported by Senior Management and relevant committees. Roles and responsibilities should be clearly defined across the Three Lines Model:
First Line: Business functions own and manage risk as part of their day-to-day activities.
Second Line: Risk and Compliance provide oversight, monitoring and independent challenge.
Third Line: Internal Audit provides independent assurance over the effectiveness of the control framework.
Where accountability is poorly defined, firms often experience duplication, gaps in control coverage and ineffective decision-making.
Defined Risk Appetite
Risk appetite articulates the level of risk a firm is willing to accept in pursuit of its strategic objectives. An effective risk appetite framework should include both quantitative and qualitative measures and be approved by the Board.
Examples may include limits relating to:
- Fraud losses;
- Operational incidents;
- System availability;
- Customer complaints;
- Financial crime breaches;
- Regulatory findings.
A clear appetite framework provides a basis for decision-making and ensures that risk-taking remains aligned with the firm’s strategy.
Meaningful Risk Reporting
Good risk reporting provides insight, rather than simply data.
Management Information should be:
- Forward-looking;
- Relevant;
- Timely;
- Action-oriented;
- Linked to risk appetite.
Boards should be able to understand not only what has happened but also what may happen next and what management is doing in response. Effective reporting supports challenge, decision-making and early intervention where issues emerge.
Dynamic Risk Registers
Risk registers remain a fundamental risk management tool. A well-maintained risk register should contain:
- Risk descriptions;
- Causes and consequences;
- Inherent and residual risk ratings;
- Key controls;
- Risk owners;
- Mitigation actions;
- Target completion dates.
The register should be actively reviewed and updated, ensuring it remains aligned with the firm’s changing risk profile.
Key Challenges Facing Payments Firms
The payments industry presents a range of unique risk management challenges.
Rapid Growth and Innovation
Many firms are experiencing rapid expansion, launching new products, entering new markets and adopting emerging technologies.
While growth creates opportunity, it can also introduce significant operational, regulatory and financial crime risks. Risk functions must therefore work closely with the business to ensure controls evolve alongside growth.
Operational Resilience
Operational resilience has become a major regulatory focus. Given the reliance of payments firms on technology and third-party providers, disruptions can have immediate impacts on customers and markets.
Risk functions play a critical role in helping firms:
- Identify Important Business Services;
- Map operational dependencies;
- Establish impact tolerances;
- Conduct scenario testing;
- Develop remediation plans.
A robust operational resilience programme helps firms prepare for and respond to disruption while protecting customers and maintaining critical services.
Outsourcing and Third-Party Risk
Payments firms often depend heavily on cloud providers, technology vendors, payment processors and banking partners.
Whilst functions can be outsourced, regulatory accountability cannot. Firms must therefore maintain effective oversight of critical third-party arrangements and ensure appropriate due diligence, ongoing monitoring and contingency planning are in place.
Regulatory Change
The regulatory landscape continues to evolve rapidly (see HM Treasury’s Modernising Payment Services Consultation).
Whether related to safeguarding, Consumer Duty, operational resilience, fraud prevention or emerging technologies such as artificial intelligence, firms must have processes in place to identify and respond to regulatory developments before they become supervisory concerns.
The Importance of Risk Culture
Even the most sophisticated framework will fail if risk management is not embedded within the firm’s culture. A positive risk culture exists where employees understand their responsibilities, feel comfortable escalating concerns and recognise that risk management is part of everyone’s role and not simply a ‘blocker’ to revenue and growth.
The Board and Senior Management play an essential role in setting the tone from the top and demonstrating that effective risk management is viewed as a business priority rather than a compliance exercise.
Strong cultures are characterised by:
- Open communication;
- Constructive challenge;
- Accountability;
- Continuous improvement;
- Clear escalation pathways.
Regulators increasingly view culture as a key indicator of a firm’s ability to identify and address risks before they develop into significant issues.
Risk as a Strategic Enabler
Historically, Risk functions were often viewed as organisational barriers whose role was to prevent business activity. That perception is increasingly outdated.
Modern Risk functions should enable growth by helping firms understand uncertainty, assess opportunities and make informed decisions.
A mature Risk function provides value through:
- Better strategic planning;
- Improved governance;
- Stronger regulatory relationships;
- Enhanced operational resilience;
- More effective financial crime controls;
- Better customer outcomes.
The most effective Risk leaders combine technical expertise with commercial awareness, ensuring that risk management supports innovation whilst maintaining appropriate safeguards.
Conclusion
The Risk function is, therefore, one of the most important components of a payments firm’s governance framework. Regulatory expectations continue to rise, while operational, technological and financial crime risks grow increasingly complex.
A strong risk framework begins with a comprehensive Enterprise-Wide Risk Assessment, supported by specialist assessments such as the Business-Wide Risk Assessment. Combined with clear governance, defined risk appetite, effective reporting and a strong risk culture, these elements provide the foundation for informed decision-making and regulatory compliance.
Ultimately, firms that view Risk as a strategic partner rather than a regulatory obligation will be best positioned to protect customers, satisfy regulators and achieve sustainable long-term growth.
How Can Complyport Help?
Complyport supports PIs, EMIs and other regulated firms in establishing and enhancing robust risk management frameworks that meet FCA regulatory expectations and support effective governance, operational resilience and sustainable business growth.
Our services include:
- Enterprise-Wide Risk Assessments and Business-Wide Risk Assessments;
- Design, review and enhancement of Enterprise Risk Management Frameworks;
- Development and review of Risk Appetite Statements and Risk Appetite Frameworks;
- Risk Register development, review and ongoing maintenance;
- Operational Resilience implementation, including Important Business Services, impact tolerances and scenario testing;
- Outsourcing and Third-Party Risk framework reviews in line with FCA expectations;
- Financial Crime Risk Framework reviews, including AML, sanctions and fraud risk assessments.
Speak to a Compliance Expert
Contact Complyport today to discuss how we can help strengthen your firm’s risk management framework and support sustainable growth.
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