What does the 'three lines of defense' model clarify in risk management?

The 'three lines of defense' model is a fundamental framework used in risk management to delineate clear roles and responsibilities within an organization. This model highlights the different levels of accountability and functions that are essential for effectively managing risk.

The first line of defense typically consists of operational management, which is responsible for identifying and managing risks in their day-to-day activities. They implement controls and procedures to mitigate risks as part of their regular functions.

The second line of defense involves risk management and compliance functions that support and monitor the first line. This group provides expertise and guidance on managing risks, helping to ensure that the first line is properly equipped to handle risks effectively.

The third line of defense is the internal audit function, which provides independent assurance that the organization's risk management processes are functioning effectively and that the organization is in compliance with laws and regulations.

By clarifying these roles and responsibilities, the model ensures that everyone in the organization understands their part in the risk management process, leading to more robust and coordinated risk management efforts. This structured approach helps in enhancing accountability, improving communication concerning risk, and ensuring that risk is managed efficiently across the entire organization.