Top Risks and Controls for Trust Services

The Fastest Growing RISK REGISTER for Banks, Insurance Companies, Brokerage Firms, Money Service Bureaus and Fintechs

Nov 2024

Any bank that deals with managing and protecting assets on behalf of its clients must have a trust services division.

These services include investment management, estate planning, and money management, among other things.

Trust services departments at banks must undertake risk analyses due to the sensitive nature of their work in order to guarantee the protection and safety of the assets entrusted to them.

A risk assessment aids in identifying potential threats and weaknesses that could jeopardise the dependability and integrity of the trust service.

Trust services departments can protect client assets, improve their reputation, and foster client trust by undertaking routine risk assessments.

Corporate Trust Services Function

Offers clients corporate trust services, such as managing escrow accounts and serving as a trustee in bond issuances.

RISK : Competitive pressures
Corporate trust services are a highly competitive market, with many players vying for market share. Commercial banks need to differentiate themselves by offering unique value propositions, such as superior technology platforms, specialized expertise, or innovative solutions.

Controls :

Continuous Innovation: To maintain a competitive edge, commercial banks must prioritize continuous innovation. Regularly invest in research and development to enhance technology platforms, explore new solutions, and stay ahead of market trends. By consistently offering cutting-edge and inventive services, banks can attract and retain customers.
Differentiated Value Proposition: Commercial banks should develop and clearly communicate unique value propositions to stand out in the competitive market. This can be achieved through superior technology platforms, specialized expertise, and innovative solutions, demonstrating a distinct advantage over competitors.

RISK : Expertise and talent
Providing corporate trust services requires specialized expertise and talent. Commercial banks need to have staff with the necessary skills and knowledge to manage the complex transactions involved in these services. This includes legal expertise, financial expertise, and technical expertise.

Controls :

Knowledge Transfer and Succession Planning: Establish a knowledge transfer framework to ensure the smooth dissemination of expertise within the organization. Encourage senior professionals to mentor junior staff and create documentation and training programs to capture and share critical knowledge. Develop a succession plan to address potential talent gaps and ensure a seamless transition of specialized skills.
Robust Recruitment and Talent Management: Implement a comprehensive recruitment process to attract and hire professionals with specialized expertise in corporate trust services. Develop a talent management program to nurture and retain skilled staff, including offering competitive compensation, continuous training, and career development opportunities.

RISK : Liability and risk management
Corporate trust services involve significant risk, and commercial banks providing these services need to manage their liability exposure. This includes developing effective risk management strategies, implementing robust legal and financial controls, and ensuring that the bank has adequate insurance coverage.

Controls :

Effective Risk Management Strategies: Developing and implementing effective risk management strategies is essential to mitigate the risks associated with corporate trust services. This includes conducting regular risk assessments, identifying potential vulnerabilities, and implementing proactive measures to address and mitigate those risks. By adopting a proactive approach to risk management, banks can minimize the likelihood and impact of potential liabilities.
Robust Legal and Financial Controls: Implementing strong legal and financial controls is crucial to mitigate risk in corporate trust services. This involves conducting thorough due diligence, implementing rigorous contractual agreements, and establishing comprehensive documentation processes. By ensuring compliance with legal and financial regulations, banks can minimize liability exposure and enhance their risk management capabilities.

RISK : Regulatory compliance
Corporate trust services are highly regulated and require compliance with a range of laws and regulations. Commercial banks providing these services need to ensure that they comply with all applicable regulations and maintain the necessary licenses and permits.

Controls :

Licensing and Permit Management: To ensure compliance, commercial banks must diligently manage their licenses and permits related to corporate trust services. This involves regularly reviewing and renewing licenses, maintaining accurate records, and promptly addressing any issues or discrepancies. Implementing a robust system for license tracking and renewal reminders can help maintain regulatory compliance.
Robust Compliance Program: Implementing a comprehensive compliance program is essential to mitigate the risk associated with corporate trust services. This includes conducting regular risk assessments, establishing policies and procedures, and monitoring and reporting on compliance with applicable laws and regulations. Banks should also appoint a dedicated compliance officer to oversee compliance efforts.

RISK : Technology infrastructure
Corporate trust services require robust technology infrastructure to manage the complex transactions involved in these services. Commercial banks need to invest in technology platforms that can handle the complexity of corporate trust services while ensuring that data is secure and transactions are processed accurately and in a timely manner.

Controls :

Data Security Measures: To maintain corporate trust services' integrity, comprehensive data security controls are essential. Banks must employ robust encryption protocols, access controls, and regular security audits to protect sensitive client information from unauthorized access, data breaches, or cyber threats.
Robust Technology Infrastructure: Implementing a state-of-the-art technology infrastructure is crucial to mitigate risks in corporate trust services. Banks should invest in scalable and resilient platforms capable of handling the complex transactions involved, ensuring uninterrupted service delivery, and minimizing the risk of system failures or disruptions.

Custody Services Function

Offers clients custody services, such as asset storage, trade settlement, and other custody-related services.

RISK : Competitive pressure
The custody services market is highly competitive, with many banks and other financial institutions offering similar services. Banks must differentiate themselves through innovation, service quality, and pricing strategies to attract and retain clients.

Controls :

Innovation: Banks should prioritize continuous innovation to differentiate themselves in the custody services market. This involves developing new and unique features, technologies, and service offerings that provide added value to clients. By staying ahead of the competition and offering innovative solutions, banks can attract and retain clients who seek cutting-edge and efficient custody services.
Service Quality: Providing exceptional service is crucial for banks to stand out. Banks should focus on delivering superior customer experiences, ensuring prompt and accurate responses to client inquiries, and maintaining a high level of professionalism and reliability. By consistently exceeding client expectations and demonstrating a commitment to excellent service, banks can build strong relationships and retain clients in the competitive market.

RISK : Liability risk
Banks providing custody services can be held liable for losses or damages resulting from errors, omissions, or misconduct. This can create significant financial and reputational risks for the bank, which must be managed through appropriate risk management and insurance strategies.

Controls :

Robust Risk Management Framework: Implement a comprehensive risk management framework that includes clear policies and procedures for custody services, emphasizing proactive identification, assessment, and mitigation of potential errors, omissions, or misconduct. Regular risk assessments and ongoing monitoring should be conducted to ensure timely detection and response to emerging risks.
Stringent Operational Controls: Establish strict operational controls, such as segregation of duties, dual authorization for critical actions, and regular internal and external audits. Implement robust technology systems and controls to minimize the likelihood of errors, automate processes where possible, and ensure secure custody of assets. Regular training and awareness programs should be provided to employees to foster a culture of compliance and risk consciousness.

RISK : Operational complexity
Custody services involve managing a wide range of financial instruments, including stocks, bonds, commodities, and derivatives. Banks must have sophisticated systems and processes in place to manage these assets and ensure accurate record-keeping, reconciliation, and reporting.

Controls :

Robust Asset Tracking and Reconciliation System: Implementing a comprehensive system that tracks and reconciles all financial instruments in real-time is crucial. This includes accurate record-keeping, regular audits, and automated alerts for any discrepancies, minimizing the risk of errors or fraudulent activities.
Strict Access Controls and Segregation of Duties: Banks should enforce strict access controls and ensure separation of duties among employees involved in custody services. This prevents unauthorized individuals from tampering with assets and reduces the risk of collusion. Regular reviews of access privileges and periodic rotation of duties further enhance security.

RISK : Regulatory compliance
Custody services are subject to strict regulatory requirements, including those related to capital adequacy, risk management, and reporting. Banks must adhere to these regulations to maintain their license to operate, which can be a significant challenge due to the complexity of the rules and the need for ongoing monitoring and reporting.

Controls :

Automated Reporting Systems: Utilize advanced technology and automated reporting systems to streamline and enhance the accuracy of regulatory reporting. Implementing sophisticated software solutions that can generate timely and accurate reports helps banks maintain compliance and reduces the burden of manual reporting, ensuring efficient and accurate reporting of capital adequacy, risk management, and other regulatory requirements.
Robust Risk Management Framework: Implementing a comprehensive risk management framework that includes clear policies, procedures, and controls to identify, assess, and mitigate risks associated with custody services. This includes regular risk assessments, stress testing, and scenario analysis to ensure compliance with regulatory requirements.

RISK : Security
The safekeeping of clients' assets is a fundamental requirement of custody services. Commercial banks must have robust security measures in place to protect against theft, fraud, cyber attacks, and other risks that could compromise the integrity of the assets held in custody.

Controls :

Regular Security Audits and Penetration Testing: Conducting periodic security audits and penetration testing helps identify vulnerabilities in the custody system. By proactively assessing the security infrastructure, banks can discover and address weaknesses that could be exploited by cyber attackers. This control ensures continuous monitoring and improvement of security measures, minimizing the risk of asset compromise.
Strong Multi-Factor Authentication: Implementing a robust multi-factor authentication system helps prevent unauthorized access to client assets. This control adds an extra layer of security by requiring multiple forms of authentication, such as passwords, biometrics, or security tokens, significantly reducing the risk of theft, fraud, and unauthorized access.

Estate Planning Function

Offers clients estate planning services, such as the creation of wills and trusts, as well as guidance on tax and other estate planning-related matters.

RISK : Client trust
Estate planning is a sensitive and personal matter, and clients may be hesitant to discuss their financial and family situations with a bank that they do not have an established relationship with. Banks will need to build trust and demonstrate their expertise and commitment to serving their clients' best interests in order to attract and retain estate planning clients.

Controls :

Establish Strong Personal Relationships: Banks should focus on building personal relationships with potential estate planning clients. This can be achieved by assigning dedicated relationship managers who are empathetic, trustworthy, and knowledgeable in estate planning matters. Regular communication and personalized attention will help clients feel more comfortable discussing sensitive information.
Showcase Expertise and Credentials: Banks need to demonstrate their expertise in estate planning by highlighting the qualifications, experience, and success stories of their estate planning professionals. This can be done through marketing materials, educational content, and testimonials from satisfied clients. By showcasing their knowledge and track record, banks can instill confidence and attract clients who value expertise.

RISK : Expertise
Estate planning is a complex area of law and finance, and it requires specialized knowledge and expertise to provide effective advice to clients. Commercial banks may struggle to attract and retain the necessary talent to offer high-quality estate planning services, particularly if they are competing with law firms and other specialized financial institutions.

Controls :

Collaborative Partnerships: Commercial banks should establish collaborative partnerships with law firms and specialized financial institutions to leverage their expertise in estate planning. This enables banks to provide comprehensive and high-quality services to clients by tapping into a broader pool of specialized talent and knowledge.
Internal Expertise Development: Commercial banks should invest in training and development programs to build internal expertise in estate planning. By offering specialized training and career advancement opportunities, banks can attract and retain talented professionals who possess the necessary knowledge and skills to provide effective estate planning advice to clients.

RISK : Fees and pricing
Commercial banks will need to establish competitive pricing structures for their estate planning services, which may be difficult to do if they are competing with specialized law firms and financial institutions that have lower overhead costs. Banks will need to carefully consider their pricing strategies in order to attract and retain clients while maintaining profitability.

Controls :

Develop Strategic Partnerships: Collaborating with specialized law firms and financial institutions can be a viable approach for banks to leverage their expertise while minimizing overhead costs. By forming strategic alliances, banks can offer comprehensive estate planning services that combine their banking capabilities with specialized legal and financial knowledge, providing a competitive edge in the market.
Enhance Operational Efficiency: Commercial banks should focus on streamlining their internal processes and reducing overhead costs to establish a competitive pricing structure. This can be achieved through automation, digitalization, and optimizing resource allocation, allowing banks to offer cost-effective estate planning services while maintaining profitability.

RISK : Integration with other services
Estate planning is just one aspect of a client's overall financial planning needs, and commercial banks will need to ensure that their estate planning services are integrated with other banking services, such as investment management and wealth management. This requires a coordinated approach across different departments and business lines within the bank.

Controls :

Coordinated Interdepartmental Collaboration: Banks must foster effective communication and collaboration among various departments and business lines involved in estate planning and related services. This coordination ensures a holistic understanding of clients' financial goals, facilitates seamless information sharing, and reduces the risk of misalignment or conflicting advice.
Integration of Estate Planning Services: Commercial banks should establish a robust framework that integrates estate planning services with other banking offerings, including investment management and wealth management. This ensures a comprehensive approach to clients' financial needs and minimizes the risk of fragmented or incomplete estate plans.

RISK : Regulatory compliance
Estate planning services are subject to a range of regulatory requirements, including state and federal laws related to wills, trusts, and estate taxes. Commercial banks will need to ensure that they are in compliance with all applicable regulations, which can be a complex and time-consuming process.

Controls :

Engaging Legal Experts: To navigate the complexities of estate planning regulations, commercial banks should engage experienced legal professionals specializing in this area. These experts can provide guidance on interpreting and complying with applicable laws, ensuring that the bank's services and practices align with the regulatory framework.
Implementing a Robust Compliance Program: Commercial banks should establish a comprehensive compliance program specifically tailored to estate planning services. This program should include regular audits, internal controls, and monitoring mechanisms to ensure adherence to state and federal laws related to wills, trusts, and estate taxes. Effective training and communication within the organization are also crucial to keep employees informed about regulatory requirements.

Fiduciary Services Function

Provides customers with fiduciary services, such as managing assets on their behalf and serving as trustee or executor in estate and trust matters.

RISK : Competition
Commercial banks providing fiduciary services face competition from other providers such as trust companies, law firms, and accounting firms. Banks need to differentiate themselves by offering competitive pricing, superior customer service, and a wide range of products and services.

Controls :

Customer-centric Approach: Prioritizing exceptional customer service is essential for banks to differentiate themselves. By focusing on personalized experiences, swift issue resolution, and proactive communication, banks can build strong relationships with clients. Offering tailored solutions, expert guidance, and prompt assistance ensures customer satisfaction and loyalty, helping banks stand out from their competitors.
Strategic Partnerships: Commercial banks can establish strategic partnerships with trust companies, law firms, and accounting firms to enhance their service offerings. Collaborating with these providers allows banks to leverage their expertise, expand product portfolios, and attract a broader customer base, providing a competitive edge in the fiduciary services market.

RISK : Complexity of services
Fiduciary services can be complex and require specialized knowledge and expertise. Banks providing these services need to have experienced staff with the necessary skills and qualifications to provide these services effectively.

Controls :

Comprehensive Staff Training and Certification: Implement rigorous training programs to ensure staff members possess the required expertise and qualifications for fiduciary services. Continuously update training modules to keep up with evolving regulations and industry practices. Encourage employees to pursue relevant certifications to enhance their knowledge and demonstrate their commitment to excellence.
Robust Staffing and Talent Acquisition: Develop a robust hiring process to identify and recruit experienced professionals in fiduciary services. Leverage industry networks, conduct thorough interviews, and assess candidates' qualifications and track records. Maintain a balanced staff-to-client ratio to ensure adequate attention and quality service delivery.

RISK : Compliance and regulatory challenges
Banks providing fiduciary services are subject to various regulatory requirements, including reporting, record-keeping, and disclosure requirements. Ensuring compliance with these regulations can be time-consuming and expensive, and non-compliance can result in significant fines and legal liabilities.

Controls :

Automation and Technology Solutions: Leveraging advanced technologies, such as automated reporting and record-keeping systems, can streamline processes, reduce manual errors, and enhance efficiency. Implementing robust software solutions, integrated databases, and data analytics tools can facilitate accurate and timely compliance, saving both time and costs associated with manual efforts.
Robust Regulatory Compliance Framework: Implementing a comprehensive regulatory compliance framework that includes regular monitoring, internal controls, and documented procedures ensures adherence to reporting, record-keeping, and disclosure requirements. This framework should encompass periodic risk assessments, employee training, and audits to mitigate non-compliance risks effectively.

RISK : Liability risks
Fiduciary services involve managing assets on behalf of clients, which can result in potential liabilities if there are errors or omissions in the management of these assets. Banks providing fiduciary services need to have robust risk management processes in place to mitigate these risks and protect themselves and their clients from potential losses.

Controls :

Regular Audits and Internal Controls: Conducting regular internal audits and implementing robust internal controls are essential for identifying and rectifying potential errors or omissions. These measures ensure compliance with regulatory requirements and help identify any weaknesses in the risk management processes, allowing for timely corrective actions.
Segregation of Duties: Implementing a clear separation of duties within the fiduciary services department ensures that no single individual has complete control over asset management. This helps prevent errors or fraudulent activities by requiring multiple individuals to collaborate and provide checks and balances.

RISK : Technology challenges
Fiduciary services often involve complex administrative tasks such as account opening, asset management, and reporting. Banks providing these services need to have robust technology platforms that can automate many of these tasks, reducing the risk of errors and increasing efficiency. However, implementing and maintaining these technology platforms can be expensive and time-consuming.

Controls :

Conduct Regular Technology Assessments: Regularly assess and evaluate the technology platforms used for fiduciary services to ensure they remain up-to-date, secure, and effective. This assessment should include cost-benefit analysis, cybersecurity audits, and performance evaluations to identify areas of improvement and make necessary upgrades or enhancements.
Implement Robust Automation Systems: Investing in and implementing advanced automation systems can significantly reduce the risk of errors and enhance efficiency in fiduciary services. By automating complex administrative tasks such as account opening, asset management, and reporting, banks can minimize human error and streamline processes.

Retirement Services Function

Provides clients with retirement planning and investment management services, including the management of retirement accounts and retirement planning strategy advice.

RISK : Client education
Many clients may not fully understand the importance of retirement planning or may not have a clear understanding of the retirement planning options available to them. Commercial banks must invest in client education and awareness programs to help clients understand the importance of retirement planning and to help them make informed decisions about their retirement planning options.

Controls :

Comprehensive Retirement Planning Workshops: Commercial banks should organize and conduct regular retirement planning workshops to educate clients about the significance of retirement planning and familiarize them with various retirement options. These workshops can cover topics such as retirement savings, investment strategies, and risk management, enabling clients to make informed decisions about their future.
Personalized Financial Counseling: Banks should offer one-on-one financial counseling sessions to clients, specifically focusing on retirement planning. Experienced advisors can assess individual financial situations, explain retirement planning options, and tailor strategies to clients' needs. This personalized approach helps clients gain a clear understanding of retirement planning's importance and allows for customized solutions to their specific circumstances.

RISK : Competition from specialized providers
There are many specialized retirement planning providers in the market, including financial planners, investment advisors, and insurance companies. These providers may have more expertise and experience in retirement planning than commercial banks and may be better positioned to meet the needs of clients.

Controls :

Client Referrals and Recommendations: Seek recommendations from trusted sources, such as friends, family, or colleagues who have successfully utilized retirement planning services. Their firsthand experiences can provide valuable insights into the quality and effectiveness of different providers, helping you make informed decisions.
Thorough Due Diligence: Conduct a comprehensive evaluation of potential retirement planning providers, considering their expertise, experience, reputation, and track record. Request references, review testimonials, and analyze their client base to ensure they possess the necessary qualifications and capabilities to meet your retirement planning needs.

RISK : Complexity of retirement planning
Retirement planning is a complex and multifaceted process that requires specialized knowledge and expertise. Commercial banks may not always have the necessary resources or staff with the required expertise to provide comprehensive retirement planning services.

Controls :

Strengthening Collaboration: Establish partnerships between commercial banks and specialized retirement planning firms or professionals to ensure clients have access to comprehensive expertise. This collaboration can enhance the range and quality of retirement planning services available to bank customers, mitigating the limitations of banks' internal resources.
Training and Education: Invest in continuous training programs to enhance the knowledge and skills of bank staff in retirement planning. By equipping employees with specialized expertise, banks can provide more comprehensive and informed guidance to customers, addressing the potential gap in resources and expertise.

RISK : Limited access to client data
Commercial banks may not have access to all of the client data they need to provide effective retirement planning services. For example, clients may have retirement accounts with other financial institutions or may have investments in non-bank products. This can make it challenging for banks to provide a comprehensive view of a client's retirement planning needs.

Controls :

Collaboration and Partnerships: Form strategic partnerships with other financial institutions and non-bank service providers to establish data-sharing agreements. This collaboration will facilitate the exchange of client information and ensure that banks have access to the necessary data for retirement planning. By working together, banks can overcome data limitations and deliver more effective services.
Enhanced Data Aggregation: Implement a robust data aggregation system that integrates with various financial institutions and non-bank platforms to collect comprehensive client data, enabling banks to access information on retirement accounts and investments across different sources. This will provide a holistic view of clients' retirement planning needs and allow for more effective and personalized services.

RISK : Regulatory compliance
Providing retirement planning services requires banks to comply with a complex set of regulatory requirements. Compliance with these regulations can be time-consuming and expensive, and banks must ensure that they have the necessary systems and processes in place to meet these requirements.

Controls :

Conducting Regular Internal Audits: Banks must establish a robust internal audit program to ensure ongoing compliance with regulatory requirements. Regular audits help identify any gaps or weaknesses in systems and processes, allowing for timely corrective actions. This proactive approach mitigates compliance risks, ensures adherence to regulations, and minimizes the potential for penalties or fines.
Implementing Robust Regulatory Compliance Software: Banks should invest in advanced technology solutions that automate and streamline the process of meeting regulatory requirements. These software systems can handle complex compliance tasks efficiently, reducing the time and effort required for manual monitoring and reporting.

Trust Administration Function

Accountable for managing payouts, trust accounts, and investment management on behalf of clients while also administering trusts and managing assets.

RISK : Client relationship management
Trust administration services are often provided to high-net-worth individuals and families, as well as businesses and other organizations. Maintaining strong relationships with these clients is essential to retaining their business over the long term.

Controls :

Proactive Communication: Regular and open communication with clients is crucial in building trust. Implement a dedicated account manager system to ensure personalized attention, promptly addressing concerns and providing updates on service delivery. Timely and transparent communication enhances client satisfaction and loyalty, reducing the risk of losing their business.
Service Excellence: Consistently delivering high-quality trust administration services is key. Focus on meticulous attention to detail, accuracy, and efficiency in handling client accounts. Strive to exceed client expectations by offering tailored solutions, anticipating their needs, and providing value-added services. Superior service quality strengthens client relationships and fosters long-term partnerships.

RISK : Managing risk
Trust administration involves managing large sums of money and complex financial transactions. Banks providing trust services need to have robust risk management systems in place to ensure that they are effectively managing the risks associated with these transactions.

Controls :

Enhance Information Security: Deploy robust information security measures, including encryption, firewalls, and multi-factor authentication, to protect sensitive financial data. Regular security assessments and employee training programs should be conducted to mitigate the risk of data breaches and unauthorized access to trust-related information.
Implement Strong Financial Controls: Establish comprehensive financial controls to monitor and manage trust transactions effectively. This includes segregation of duties, regular audits, and stringent approval processes to prevent fraud, errors, and misappropriation of funds.

RISK : Regulatory compliance
Trust administration services are subject to a complex web of laws and regulations at the federal and state levels. Compliance with these laws can be a significant challenge, especially as regulations are subject to frequent updates and changes.

Controls :

Compliance Training and Education: Develop and deliver regular training programs to ensure employees are knowledgeable about the laws and regulations governing trust administration services. This training should cover key compliance requirements, updates, and best practices. Additionally, provide resources such as manuals, reference materials, and online platforms to support ongoing education and awareness.
Robust Regulatory Monitoring and Update System: Implement a comprehensive system to continuously monitor and track changes in federal and state laws and regulations related to trust administration services. This system should include automated alerts, regular compliance reviews, and a dedicated team responsible for staying up-to-date with regulatory changes.

RISK : Talent management
Trust administration services require specialized skills and knowledge, including legal, tax, and financial expertise. Commercial banks need to attract and retain talented professionals in these fields to ensure that they can provide high-quality service to their clients.

Controls :

Rigorous Talent Acquisition and Retention Strategy: Implement a comprehensive recruitment process to attract skilled professionals with expertise in trust administration services, legal, tax, and finance. Offer competitive compensation packages, professional development opportunities, and a supportive work environment to retain top talent.
Robust Training and Development Programs: Establish ongoing training initiatives to enhance the skills and knowledge of employees in the areas of trust administration, legal, tax, and finance. Regularly update training materials to keep pace with industry advancements, regulations, and best practices.

RISK : Technology
Technology is playing an increasingly important role in trust administration services, particularly as clients seek more online and digital solutions. Commercial banks need to invest in the latest technology to provide the best possible service to their clients while also ensuring that their systems are secure and resilient.

Controls :

Continual Technology Upgrades: Commercial banks must prioritize regular updates and upgrades to their technology infrastructure. This ensures that they can leverage the latest security features, address vulnerabilities, and provide clients with efficient and reliable online services while staying ahead of potential threats.
Robust Cybersecurity Measures: Implementing advanced cybersecurity protocols, including firewalls, encryption, multi-factor authentication, and regular security audits, is crucial to safeguard client data and prevent unauthorized access or data breaches.