Effective risk assessment for AFS licensees involves identifying risks, analysing their likelihood and impact, evaluating existing controls, and determining appropriate treatments. ASIC expects this process to be structured, documented and integrated into broader risk management and compliance systems.
Expanded Answer
Risk assessment is the process of understanding what could go wrong and how significant those risks are. The first step is identifying risks across the business, including advice, operational, compliance, conduct and strategic areas. This requires input from across the organisation, not just compliance teams, to ensure risks are comprehensive and relevant.
The next step is to analyse and evaluate those risks. This involves assessing the likelihood of each risk occurring and the potential impact if it does. Existing controls should then be considered to determine the “residual risk” position. This helps prioritise which risks require further action and which are within acceptable tolerance levels.
Finally, licensees must determine and implement risk treatments. This may include strengthening controls, introducing new processes, increasing monitoring, or accepting the risk where appropriate. ASIC expects this process to be ongoing, with regular review, clear ownership, and linkage to incident management, breach reporting and governance oversight. For further context, see Understanding Risk Management: A Practical Guide for Licensees and Advice Professionals and How Assessment Feeds into Broader Frameworks in Risk Management 2.0: The Evolution of Risk Management in Australian Financial Services.
Why it matters
Weak risk assessment leads to poor prioritisation, missed issues and ineffective controls. ASIC scrutiny often focuses on whether licensees can demonstrate a clear, structured approach to identifying and managing risks.
Practical guidance
- Identify risks across all key business areas, ensuring input from relevant stakeholders
- Assess the likelihood and impact consistently, including consideration of existing controls
- Document and review risk treatments, linking them to monitoring, incidents and governance processes
Further reading
Root cause analysis for AFS licensees: a comprehensive guide