HM Treasury Risk Management Framework
Introduction
1. This paper summarises the framework within which HM Treasury manages risks, including those which could affect the public.
2. Under the Modernising Government programme, departments are setting out their approach to risk management in their areas of responsibility. The Treasury is also working with departments on the improvement of risk management and internal control as part of the corporate governance agenda. This includes the requirement that Accounting Officers sign a Statement of Internal Control as part of the annual accounts for departments.
3. This paper reviews separately the treatment of risks to the Treasury's policy objectives; risks to its processes; and the steps taken to improve resilience to shocks.
Anticipating risks to policy objectives
4. The Treasury's aim is to raise the rate of economic growth, and achieve rising prosperity, through creating economic and employment opportunities for all. This aim, and the objectives in the Treasury's Public Service Agreement (PSA), are underpinned by targets which cover the key areas of the department's activity. Those targets are set out in the PSA and in the Treasury's Service Delivery Agreement. Performance against the targets is monitored quarterly, and reported to Parliament annually in the Treasury's Departmental Report. Supporting targets are set for units within the organisation, and are regularly monitored by management.
Internal links
- Public Service Agreements 2001-2004: HMT
- Service Delivery Agreements: HMT Contents
- Departmental Reports
5. The anticipation and assessment of risks to delivery of these objectives and targets is a central part of the Treasury’s activities.
6. The Treasury’s objectives relate to the whole economy. As a result they can be influenced by an enormous variety of risks, each of which relates to only a subset of economic activity. It would be impossible to identify all of those risks. Instead the focus of a large part of the Treasury’s business is on getting early warning when risks become more imminent, or start to take effect. To help with this the Department seeks to base policy work on a robust evidence base, and maintains contacts with a great range of outside organisations, including individual businesses, groups representing different parts of society, academics and overseas contacts.
7. For example the Treasury chairs the monthly meetings of the standing committee on financial stability with the Bank of England and the Financial Services Authority. This plays a key role in monitoring threats to the stability of the financial system and dealing with such threats as may arise.
Operational Risks
8. As well as these risks to policy, the Treasury faces a number of operational risks. These have potential direct impacts on its processes and systems. Some Treasury systems affect most aspects of the Department’s business, including its main core of policy work. These include
Infrastructure– eg IT systems, power supply systems, business relationships with suppliers, communication systems.
Health and safety, including the safety of visitors to our buildings
Personnel, in particular the systems which ensure that we recruit, retain and motivate high calibre staff who have the skills and experience to deal with the wide variety of work we undertake
The Treasury’s own financial management systems
9. Other systems are specific to individual business areas, such as the management of the Consolidated Fund and the other accounts at the centre of the Government’s finances.
10. The framework for dealing with all these operational risks is built on a regular process of risk assessment managed by the department’s Internal Audit team and approved by the Audit Committee. This process identifies and scores key risk factors, and results in a hierarchy of key risks. This enables managers to maintain controls and plans which respond to those risks. Approaches include
Development of options and plans for dealing with and responding to a range of events and variables
Learning from experience through post hoc analysis of the development of policy and assessment of the Treasury’s and others’ response to events
Ensuring that we have the staff and systems in place to identify and assess risks
Resilience
11. The Treasury’s policies include a variety of measures for managing risks and improving resilience to shocks. Transparency and prudence are key strategies in this respect.
12. Transparency ensures that a wide range of analysis is brought to bear on an issue, reducing the risk of error. For example, the framework established in 1997 introduced a new openness in monetary policy. The Bank of England sets interest rates against a published remit, which includes a target rate for inflation. It produces an Inflation Report which is scrutinised closely by outside commentators. The Code for Fiscal Stability and Departmental Resource Accounts are bringing a similar transparency to fiscal policy and public expenditure respectively. The Treasury publishes the forecasts of other leading authorities alongside its own in Budget and Pre-Budget reports. In recent years it has issued a wide range of papers explaining policy and analysis, for example, the series on “The Modernisation of Britain’s Tax and Benefit System” and “Analysing UK Fiscal Policy”.
13. Prudence ensures that there is sufficient leeway to manage downside risks if they arise. The projections of the public finances which are published in annual Budgets and Pre-Budget reports are always founded on prudent assumptions and tested against a cautious case of trend growth 1 percentage point lower than the central estimate. The key assumptions are audited by the National Audit Office. On the expenditure side of the public finances the main responsibility for managing most risks falls to individual Departments. The Treasury sets a framework which enables and encourages Departments to manage those risks: that includes the requirement described above to produce a Statement of Internal Control; advice to Departments to make some provision for contingencies in their own budgets; and publication of the booklet “Management of Risk: A Strategic Overview”. To help manage those exceptional cases where the effects of risk cannot be borne by an individual Department’s budget the Treasury maintains a public spending reserve.
Review of risk
14. The Treasury is working to strengthen further its business planning process as part of the Civil Service reform agenda. In the course of business planning, Treasury managers will gain assurance about the identification, assessment and management of the risks attaching to key policies, objectives and processes. This will supplement other means of review, such as the work of the department’s Internal Audit Team.
HM Treasury
February 2001