FMSB Publishes “3 Lines” Study and Register

The Financial Markets Standards Board (FMSB) has published a Spotlight Review and a Risk Register for the “3 Lines Model” of risk management, initially known as the “3 Lines of Defence”, which is widely deployed in financial services.

Rather than being considered an organisational structure, the FMSB Review calls for the model to be re-positioned more beneficially as a lens through which to examine key aspects of risk management frameworks, namely, effective process design, checks and balances, efficiency and effectiveness vis-a-visoutcomes and staff behaviour.

Overseen by boards, the 3 Lines consists of the first, management and business generators (CEO, traders, sales and origination, etc.); second, risk and compliance teams; and third, internal audit, business layers.

In late 2022, under the leadership of Standard Chartered’s Tracey McDermott, group head conduct, financial crime and compliance, market practitioners led by Bank of America’s Alan Leigh, MD, global banking & markets, created an FMSB Working Group to look in-depth at the model, identify frequently arising risks and how to address them practically.

The standard-setting body says the 3 Lines Model, if poorly applied, can contribute to difficulties such as siloed knowledge, disputed accountability, excessive duplication and protracted technical issues. Using the lens to assess risk enables an evaluation of the activities people perform wherever they sit in an organisation, including the sort of misbehaviour that derails well-designed and governed policies and processes, it adds.

FMSB’s member subject matter experts developed the paper to help the financial industry understand how the model can evolve and be implemented most successfully. It contains a Risk Register which lists hot spots to help practitioners consider how best to approach the problems.

“The power of FMSB is illustrated in the collective knowledge-share among Members who review foundational concepts such as the 3 Lines Model and refine them to meet the unique challenges faced in today’s global wholesale markets,” says FMSB CEO Myles McGuinness. “I would like to thank Members and stakeholders who contributed to this publication.”

Leigh, who led the work with one of FMSB Secretariat’s senior technical specialists, Ted MacDonald, adds, “It’s useful to view the model as a lens. It is a framework for assessing organisational infrastructure around risk of all kinds, the relevant checks and balances as well as the approach to assurance. No organisational unit is immune to risks or mistakes. This lens can be of use in assessing individual functions as well as the organisation as a whole.”

Meanwhile, McDermott, who is chair of FMSB’s Conduct & Ethics Committee, says, “As the 3 Lines Model continues to develop and evolve it is important to take a step back and consider what is working and what can be improved. This Spotlight Review provides a snapshot of how FMSB Members are thinking about these issues and some practical suggestions about risks to watch out for.”