The document outlines HML's transformation in operational risk management, highlighting the effectiveness of its risk management framework and addressing gaps in past approaches. It shows a significant reduction in operational losses and an improvement in risk compliance, supported by a structured process and technology integration. The overall goal is to align risk management with business strategy to achieve sustainable objectives while minimizing potential threats.

1. Delivering a Risk-Led Transformation
Gillian Weatherill– Head of Operational Risk

2. Agenda
• HML Overview
• Journey
• Risk Management
• Outcomes
• Whats next’
• Questions

3. Service range
• Financial services prime
and subprime UK residential
mortgages.
• RSS2- rating special
servicing
• Over £43bn residential and
commercial mortgages
currently under management
in UK and Ireland
• 1,300 employees based
across 3 UK sites, including
a 450 seat call centre
handling up to 13,000 calls
per day

4. Journey
“The greatest antidote to worry….is preparation.
The more you try to envisage what might happen
and what your best response and options are, the
more you are able to allay your fears for the
future.”
John Glenn, Astronaut
© HML 2010. All rights reserved. 4

5. Risk Management Effectiveness Review

6. We recognised that there were gaps in our approach to
Operational Risk Management…..
•Silo operational risk
processes.
• Key Risks identification
disconnected from
performance & objectives
• KRI’s definition – partial
• Policy documents –
limited governance and
assurance
• Lack of enabling
technology
• Poor alignment to strategy

7. Our approach, closed gaps and enabled us to meet our
challenges...
• Increased resources for
assurance activity and “deep
dive” work
• Risk integrated with Strategy
• Comprehensive set of Key
Risks & Controls
• Robust enabling technology to
support the risk management
framework
• Comprehensive policy suite
• Maturity model &
effectiveness BSC to set
change agenda

8. Risk Management Framework

9. Risk Management
Remember that all models are wrong; the
practical question is how wrong do they have to
be to not be useful.”
George E. P. Box ( Statistician)
©© HML 2010. All rights reserved.
9 HML 2010. All rights reserved.
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10. Risk Role in HML’s Strategic Execution
To provide excellence in risk management to support the sustainable
achievement of HML’s strategic objectives within its defined risk
appetite.
ADVICE OVERSIGHT CHALLENGE
Business focused advice and Passionate focus on supporting Continuous improvement in risk
oversight which adds value business excellence management practices
Oversight, Challenge & Functional Leadership
Delivered through highly skilled and positively motivated risk people, within an
overall approach respected and valued by the business.
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11. Risk Management Approach
The HML enterprise wide risk framework and supporting structure is designed to
promote a risk aware culture and to help ensure that effective procedures are in place
to identify, assess, measure and monitor risk across HML. The objective is to provide:
Independent Integration of risk
Clear accountability
oversight and management as part
for the management
challenge of the of day to day
of risks.
management of risk business
Risk Management Systems and Controls reduce risk, minimise losses and provide peace of mind
that a robust and effective control framework is in place.
© HML 2009. All rights reserved. 11

12. Focus on integrated Governance, Risk & Compliance
RISK COMPLIANCE
GOVERNANCE Process that ensures HML adheres
Extent of uncertainty around achievement of
Process by which ELT & SLG set to its internal policies, and that
business objectives. Risk management being
overall business objectives and policies and procedures established
the process of identifying, sourcing,
oversee progress towards those to comply with applicable laws and
measuring, mitigating and monitoring risk.
objectives. regulations are performing as
Purpose being to:
- reduce to acceptable level variability in intended.
pursuit of opportunities
- minimising impact of extreme events
- take prudent risks that HML can manage
successfully as it creates value.
Event identification Control activities
Internal Environment
Risk assessment Info & communication
Objective Setting
Risk response
Monitoring
Aligned activities
© HML 2009. All rights reserved. 12

13. Risk Identification and Assessment
The ERM framework is used to understand the links between what we want
to do, what could stop us, and how we manage and monitor performance.
All the data is held in our bespoke software solution ‘Insight’.
What process do we need How do we monitor changes in
What threats will stop us to control and what is the performance, risk and controls
What are we trying to achieve our objectives? right level of control? effectiveness?
achieve?
Performance Risk Controls Indicators
Objectives Key Risks Key Controls Key Indicators
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14. Control Effectiveness
The Control Self Assessment (CSA) quarterly certification process was
introduced in Q4 2009
The process involves all key controls across all divisions being reviewed,
capturing:-
• the control purpose
• an assessment of the effectiveness of the control
• documentation of proof to support the certification
Line 1 Line 2
challenge validation
Key
Certification
Controls
-Type -Certified effectiveness
- Assessment score - Improvement action
- Expected performance
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15. Outcomes: So what?

16. Direct Operational Losses by Year
The graphs opposite show the operational
losses paid out from January 2007 - September
2011, by value and volume in the year the error
occurred.
• The improvement in performance is
illustrated and there has been a 93%
reduction in the value of losses that have
occurred during 2010 compared with
those that occurred during 2008.
• From 2007, there has been a 56%
reduction in the volume of losses that
occurred during 2010 compared with
those that occurred during 2008. In
addition, the severity of losses has
reduced over the years and, for the
losses that occurred during 2010, 97% of
the volume of these were for individual
amounts that were less than £1k.

17. Audit Actions
The graphs are based on all issues % of issues added each year by Grade
raised from internal audits, external
reviews and internal compliance and 100%
assurance reviews 90%
80%
The percentage of issues that are rated 70%
Significant / High risk has decreased
year on year since 2008. In 2008 24% 60%
of issues were rated Significant or High. 50%
This reduced to 14% in 2009 and again 40%
to 10% in 2010. So far in 2011 the % of
30% Low / Efficiency
high issues stands at 5% of the total
Medium
issues added. 20%
Significant / High
10%
The percentage of issues rated medium 0%
2008 2009 2010 2011
risk has also decreased from 48% in
2008 to 45% in 2011.
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18. •Q&A
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19. Strategy and Risk Management Executive
Breakfast
3 Movember 2011