What is operational risk? The 5 key risks facing financial institutions and how to manage them

Operational risk management in financial institutions covers a broad set of risks, including IT disruption, data breaches, theft and fraud, regulatory obligations and the wellbeing of employees.

Below are five key operational risks that financial services firms should be aware of, so your business is ready to meet these challenges and prepared to mitigate any emerging risks of the future.

What is operational risk?

Operational risk is the risk of loss caused by something going wrong in the day-to-day running of an organization. The Basel Committee on Banking Supervision defines it as "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events." The definition includes legal risk but excludes strategic and reputational risk.

1. IT challenges

IT disruption has emerged as a serious risk in recent times as cyberattacks become more advanced and IT failures are a common occurrence.

If contending with unstable Wi-Fi connections, VPN failures and even ransomware attacks is a reality you are all too familiar with, you wouldn't be alone.

The UK government's Cyber Security Breaches Survey 2025/26 found that 43% of UK businesses (approximately 612,000) reported a cyber security breach or attack in the last 12 months. Phishing was the most common type, experienced by 38% of businesses. The survey covers UK businesses across all sectors, not only financial services.

With hybrid setups here to stay, we can expect further IT challenges as we continue to adapt to fresh ways of working.

2. Data breaches

Data breaches are usually down to flawed processes and procedures, but they can also be due to employee mistakes or even deliberate wrongdoing.

As staff continue to work from home, it's unlikely that cyberattacks and data breaches will ease up over the coming years. If you have not already put controls in place to reduce the risk of data breaches, it would be wise to do so. After all, failing to protect your organization's data could lose you the trust of your customers and have a detrimental impact on your reputation.

What's more, data breaches can be costly. It therefore goes without saying that the risk of data breaches is not one to underestimate.

3. Theft and fraud

Theft and fraud is yet another area where the impact of a turbulent economy can be seen. As we become an increasingly digital world, there's no sign that our reliance on online financial services, and the threat of theft and fraud that comes with it, will slow down.

UK Finance's Annual Fraud Report 2026 says its members reported that criminals stole £1.28 billion through payment fraud in 2025, an increase of 4%. Authorized push payment (APP) fraud losses rose 19% to £576.4 million, while unauthorized fraud losses fell 5% to £703.4 million. UK Finance also reports that 66% of APP fraud cases started online.

UK Finance says the industry prevented £1.68 billion of unauthorized payment fraud in 2025, equivalent to 70p in every £1 of attempted fraud. These figures are reported by UK Finance members and cover payment fraud, not all fraud. Read the UK Finance press release.

4. Regulatory obligations

The risk of non-compliance with regulation is ongoing.

With new rules and requirements constantly being introduced, financial services firms need to be ready to deal with this rapidly changing regulatory landscape. Ensuring that non-compliance is considered within your risk management strategy alongside other operational risks is a good start. Although risk and compliance are often dealt with separately within organizations, coordinating your risk and compliance practices can help ensure that you are well-equipped to handle regulatory risk.

5. The wellbeing of employees

Employee wellbeing has become an increasingly hot topic as a top operational risk for financial services. And it's no surprise as to why. Added to the general anxiety created by much uncertainty over the past few years, juggling a work-life balance continues to be almost impossible for some, with burnout being seen across many businesses.

Employee wellbeing may seem like a difficult risk to manage. Nonetheless, employers must do what they can, and act quickly. If this threat is not effectively managed, financial services could risk losing staff.

Managing operational risk in financial services

IT challenges. Data breaches. Theft and fraud. Regulatory obligations. Employee wellbeing. Traditional risk management processes may not be enough to cope with the varied operational risks facing financial services, and a robust risk management strategy is a necessity for businesses.

Cyberattacks and data breaches, for example, are best dealt with using an enterprise risk management strategy (ERM). This method is proactive, reliable and more suited to handling today's risks. ERM also provides you with a greater senior-level view of the risks your organization needs to manage, helping you to better collaborate, allocate resources and prioritize risks.

Risk management software also brings numerous benefits. If recent years have proved anything, it's that operational risk management in financial institutions will need to ensure they have the best tools and strategies in place to ensure that their strategies are effective. Investment in technology, as well as adopting an ERM strategy, can support you.

These risks keep shifting, so the strategy behind them has to keep moving

From IT disruption and data breaches to fraud, regulation and employee wellbeing, the risks facing financial services firms share one trait: they change as the way people work and transact changes. A robust risk management strategy, an ERM approach and the right technology give firms a clearer, senior-level view of what needs attention first. For you, the practical step is to review each of these five areas against the controls you already have and make sure a named person is responsible for the response.