Challenges of Regulatory Reporting within Banking and Financial Services

Challenges of Regulatory Reporting within Banking and Financial Services

Before recognising the challenges, I am obliged to write a few words on the underlying mainstays to this subject. Firstly reporting, the textbook defines it as a spoken or written account of something that has been observed, heard, done or investigated. When we add “to” after reporting it then transforms the meaning into being responsible to a supervisor or superior. Here in lies the issue, people and in turn organisational management are intrinsically uncomfortable to supply their internal data to external parties for scrutiny.

Secondly regulate, which is to control using rules and policies obviously via external institutions further impedes this topic.

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Simply put, the 2008 liquidity crisis originating from systemically reckless practices and products, spearheaded by some global banking companies mainly headquartered in the United States put the wider global public interest at risk. This provided governments with perfect impetus (within the then largely deregulated operating environment) to act to defend the same public interest and protect systemic institutions from re-experiencing the scenarios that have played out over the past decade.

Over this time, regulators and their industry counterparts have worked relentlessly to reach an equilibrium. To be explicit, I am not implying a compromise, rather a growing collaboration and acceptance that regulation is virtuous and now part of mainstream business as usual and industry leaders and their management teams have aligned themselves to this reality.

Finally, what were these original challenges that are perhaps still relevant for us to understand in 2020? For simplicity I have classified these into two broad groups (i) Management of Operational Risk and (ii) Issues with Regulations.

Management of Operational Risk

To articulate this point, I rely on the evolution of Basel 1 ,2 and 3 requirements. As my industry colleagues would be aware these rules clearly articulate requirements around people, systems and internal processes to effectively manage liquidity, market and operational risks.

Each subsequent version has incrementally increased the requirement thresholds around managing Operational Risk. This was necessary to prevent industry contagion that could potentially lead to any systemic failures as seen in 2008.

It is this operational risk category that I would choose to argue is the most significant within this context. Why? because it is wholly (should be) in control of organisational management and any shortcomings found are an immediate reflection of management inefficiencies.

Over the previous two decades (1990-2008) the growth bubble within this sector has resulted in industry leaders largely relegating, rather even sacrificing key topics around internal and external fraud prevention, ethical product development, client interest and overall operational resilience in favour of double digit growth.

And thus, due to the significant size of the resultant issue.

I firmly believe organisational leadership at board level has taken the best part of the following decade to get to grips with this challenge. With sustained efforts operational control has slowly increased and the reluctance to share meaningful data has reduced.

Nevertheless, I believe there is more ground to be covered here and leveraging technology to the fullest is the best choice at this opportune time.

Issues with Regulations

I list below some of the key challenges with regulation itself.

  • Asymmetric Data resulting in the gaps between data required for regulation and data available & supplied.
  • Reactive Oversight as data being received by the regulators is always post event and not real time meaning any audit points arising are always looking to address an issue post event, this is where policy enforcement, policy monitoring and spot inspections are key tools regulators should be empowered to use.
  • Ethical conundrums are created when for example cost of a bailout is picked up by wider taxpayers within a country, which in turn incentivises excessive risk taking without personal consequences.
  • Regulatory Collusion arises when professional boundaries between employees working for regulators and their industry counterparts become blurred resulting in unwarranted changes to regulations resulting in diluting their effectiveness and anticipated benefits.
  • Collateral Consequences of regulations due to deregulation around key financial numeric, excessive regulation resulting in making the sector unprofitable resulting in reduced competition and ultimately impacting the public interest.

Nevertheless, I believe there is more ground to be covered here and leveraging technology to the fullest is the best choice at this opportune time.


A Strategic Holistic Approach

What is becoming evident is that some organisations are looking towards a more holistic approach to regulatory reporting, pertaining to having an integrated ‘data hub’ that can be used to meet multiple regulatory reporting requirements. This also lends itself to the cross validation of multiple reports that regulators are undertaking.

Greater co-ordination and consolidation of data across operations, finance, and risk not only supports the interdependencies of external reporting, but supports robust internal reporting and MI whereby everyone can look at a different cut of the same data depending on their own internal requirements.

As organisations grow and frequency of regulatory reporting increases, reporting processes need to be adaptable to changes in content, format and timing of requirements. Keeping up to speed with change, can be better addressed looking holistically rather than looking at regulations in isolation.

What Could the Future Look Like?

We are seeing the emergence of global reporting, a good example being the Common Reporting Standard (CRS). This poses the question as to whether the notion of global regulation is something that we may need to get used to in the future. Each jurisdiction that adopts CRS takes this standard which is in turn formalised by their local tax authority. This undoubtedly leads to additional complexity in ensuring that the right information is reported in the desired format to the relevant tax authorities.

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To summarise, regulatory reporting submissions are only as good as the data they contain.

Constant activity which encompasses formal preparation, robust submission, comprehensive sign-off and approval, on-going maintenance and review are some of the key components needed to have confidence in submissions.

It’s the linking of the regulations to processes, to controls, to roles and responsibilities and to risks, all of which are underpinned by robust, automated control regimes, data validation and integrity and comprehensive audit trails.

Overall, this will generate confidence in organisational regulatory reporting and ongoing compliance with regulations.

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Mihir Joglekar1 Posts

Mihir Joglekar is a Business Analyst at AutoRek, a provider of a range of deployments that vary from high volume data migrations, elimination of manual processes and spreadsheets, regulatory reporting, reduction in fast close processes, to mitigation of operational and regulatory risk.


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