How to Build a Robust Risk Management Framework for an AFSL

Key Takeaways

• An effective risk management framework is a core general obligation for all AFS licensees under section 912A(1)(h) of the Corporations Act.
• The framework is a living system of policies, procedures, and culture—not just a static document.
• Key processes include risk identification, fostering a strong risk culture led by senior management, and conducting regular monitoring and reviews.
• Modern frameworks must specifically address emerging threats like cyber-attacks and the risks associated with using Artificial Intelligence (AI).
• ASIC expects your framework to be tailored to the ‘nature, scale, and complexity’ of your specific business operations.

In our guide to the AFS Licensee General Obligations, we identified having ‘adequate risk management systems’ as a foundational duty. But what does that actually mean in practice? It’s about more than just having an insurance policy; it’s about building a systematic and proactive way of protecting your clients, your business, and the integrity of the market.

A strategic risk management framework is one of the most important assets for any licensee. It helps you make better decisions, prevents costly mistakes, and demonstrates to the regulator that you are running a well-governed business. From our experience, licensees who embed risk management into their culture are far more resilient and successful in the long run.

What Exactly Is an AFS Risk Management Framework?

An AFS risk management framework is the complete system of coordinated activities your business uses to direct and control risk. According to ASIC, this includes all the structures, systems, policies, procedures, and people involved in identifying, assessing, managing, and monitoring the risks you face (see RG 132 & RG 259).

Think of it as the central nervous system of your compliance efforts. It’s not a document you create once and file away. It’s a dynamic, ongoing process that should be woven into your daily operations and strategic planning. A good framework allows you to anticipate problems before they happen and respond effectively when they do.

What Are the Key Processes in an Effective Risk Framework?

A strong framework is built on several interconnected processes that work together. Skipping a step or doing it poorly can weaken the entire system. Your framework should be structured around three essential activities: identification and assessment, fostering a strong culture, and continuous monitoring.

How do you identify and assess risks?

You can’t manage a risk you haven’t identified. The first step is a thorough and honest process of identifying all material risks to your business. This should be documented in a central risk register.

These risks typically fall into several categories:

• Operational Risk: The risk of loss from failed internal processes, people, or systems (e.g., human error in advice delivery, IT system failure, fraud).
• Compliance Risk: The risk of failing to comply with laws and regulations (e.g., breaching the Best Interests Duty, inadequate fee disclosure).
• Market Risk: The risk of losses arising from movements in market prices.
• Credit Risk: The risk of loss if a counterparty fails to meet its obligations.
• Strategic Risk: The risk of failing to meet your business objectives (e.g., losing market share to a competitor).

Once identified, each risk needs to be assessed based on its likelihood of occurring and its potential impact on the business. This helps you prioritise which risks need the most attention.

What does a strong risk management culture look like?

A risk register is useless if it’s not supported by the right culture. A strong risk management culture always starts at the top. The board and senior management are responsible for setting the tone and demonstrating a genuine commitment to ethical and compliant behaviour.

According to ASIC, this involves:

• Providing sufficient resources for risk management functions.
• Ensuring clear communication of risk policies and responsibilities to all staff.
• Demonstrating a commitment to doing the right thing, even when it’s difficult.

A common mistake we see is the “compliance department problem,” where risk is seen as solely the responsibility of one person or team. In a strong culture, everyone in the organisation understands their role in managing risk.

Why is ongoing monitoring and review so important?

Risk is not static. Your business changes, the market evolves, and new regulations are introduced. Your risk management framework must adapt accordingly.

This means risk management is an ongoing process of monitoring and review. You should be regularly assessing your identified risks and checking that your controls are still effective. As a rule, your entire risk management system should be formally reviewed at least annually to ensure it remains relevant and effective.

How Do You Integrate Cyber Risk into Your Framework?

In today’s digital world, cyber risk is no longer just an “IT issue”—it is a critical operational risk that requires specific and focused attention from senior management. A significant cyber-attack could cause immense financial and reputational damage to your business and your clients.

ASIC has been very clear about its expectations. Your risk management framework must explicitly address cyber resilience. Good practices identified by the regulator include:

• Ensuring the board achieves “cyber resilience fluency.” This means leaders must understand the threat landscape and be able to ask the right questions of their risk and technology teams.
• Implementing robust data protection. This includes measures like encrypting sensitive client data, both when it’s stored and when it’s in transit.
• Using enterprise-wide monitoring systems. These tools can help integrate threat sources and detect potential intrusions in real-time.
• Viewing cyber resilience as a management tool. A strong cyber posture isn’t a limitation; it’s a tool for making informed decisions and protecting the business’s value.

What About the Risks of Using Artificial Intelligence (AI)?

The adoption of AI in financial services is growing rapidly, offering huge benefits in efficiency and client service. However, AI also introduces new and complex risks that must be managed within your existing framework.

In its Report 798, ASIC highlighted several potential consumer harms from AI that licensees must guard against:

• Manipulation or exploitation of behavioural biases through micro-targeting.
• Breaches of data privacy and security, as AI models can reproduce confidential information.
• Erosion of consumer trust due to a lack of transparency in how decisions are made.

A key finding from ASIC’s review was that governance often lags behind the adoption of AI. It’s vital that your risk management leads, not follows, your use of new technology. Importantly, if you rely on a third-party vendor for an AI model, you remain fully accountable for the outcomes. ‘Vendor risk’ is not a defence.

A Final Thought

Building and maintaining a robust risk management framework is a continuous journey, not a destination. It requires diligence, honesty, and a commitment from everyone in your business. By treating it as a strategic asset, you not only meet a core compliance obligation but also build a more resilient, trustworthy, and successful business prepared for the future.