Driving Compliance and Regulatory Reporting in Global Economies
(Published in the Financial Express in 2019)
Dr. Shah Md Ahsan Habib[1]
Regulatory reporting requirements changes remarkably following the most recent financial crisis of 2008-09 and the new regulatory compliance and reporting requirements cover a variety of reports of banking organizations as the result of the increased focus on compliance and regulations. The key reasons for these growing requirements are to address and measure systemic risk; and to enforce stringent prudential standards. Newer compliance and regulatory reporting requirements came up also to address the challenges of growing financial crime especially money laundering and terrorist financing. These new regulations and reporting requirements help detect, report, and prevent suspicious activities at financial institutions.
Following the most recent financial crisis, the additional regulatory requirements further increase the complexity. Between 2008 and 2016, there has been a 500 percent increase in regulatory changes in developed markets, which has led to 10-15 percent of the total workforce of financial institutions working under compliance functions, as claimed in a Thomson Reuters study. It has been observed that the regulators across Asia-Pacific continue to step up their pressure on banks to achieve more transparency and consistency. In the similar fashion, changes in other developing and low income countries are not very different.
Addressing these high regulatory demands is challenging and expensive for banks. Greater compliance and regulatory reporting requirements brought notable changes in terms of high cost and consumption of business hour. There are opinions that ideally a financial institution is expected to spend 80 percent of its time for data analytics review and 20 percent on data preparation. However, most spend more time on data collection and treatment and less on data analytics. Often the absence of enterprise level strategy and budget makes the entire process complex and challenging.
Frustrations were apparent at the annual gathering of the financial services industry at Euro Finance Week in Frankfurt in November 2014. Christian Clausen, who was president of the European Banking Federation (EBF) until the end of 2014, told the audience that it was time to ask whether we have gone too far, too fast: ‘It is time to recalibrate the regulations … banks need to be competitive and need to be able to lend’.
Alongside stringencies and identities, there were efforts for rationalization in some instances. For example, in USA, alongside enforcing several new requirements, a separate act is in the process of implementation covering new requirements and relaxation as well. Notably, the act is expected to ensure increased focus on compliance with regulations, and at the same time reducing reporting burden for community banking organizations. More specifically, in building the post-crisis framework, the Federal Reserve designed its supervision and regulation to take on increased stringency the larger a firm’s size and systemic footprint. This can be seen in larger or more complex banks facing stricter requirements in various elements of the regulatory capital framework, including the application of the supplementary leverage ratio, as well as certain buffers and surcharges, among others. And, these and other enhanced standards and supervisory tools have not been applied to smaller and community banks, resulting in a tailored and more appropriate regulatory framework for these institutions. Some key provisions of the act are targeted tailoring measures to reduce the regulatory burden on community banks.
In response to the transformation, banking organizations have no option but to continue to drive effectiveness and efficiencies across their risk and compliance programs alongside their business development. Large US and European banks are spending billions on technology to help them comply with newly evolving regulations. In its Digital Regulatory Reporting (DRR) project, the UK Financial Conduct Authority (FCA), in conjunction with the Bank of England, has invited financial institutions to explore ways to work smarter on these activities by delegating much of the hard work to technology. Success in the endeavor, as the FCA put it, ‘opens up the possibility of a model driven and machine readable regulatory environment that could transform and fundamentally change how the financial services industry understands, interprets and then reports regulatory information.’ The on-going shift reflects a regulatory and supervisory policy focus on the digital transformation of financial services and the challenges and risks presented by technological innovation, new market participants and evolving business models. Regulators are transforming too; trying to integrate new technology and data into their own supervisory processes, regulatory reporting and market oversight.
It is obvious that the crisis exposed the need for high quality, comparable and timely data on the global financial network. Since then, policymakers, supervisory authorities and standard-setters in Europe have been collaborating to greater harmonize and standardize regulatory reporting for banks. Now changes are taking place in the template as well. A solution adopted by the country’s forward-thinking central bank and banking sector represents a new approach to regulatory reporting, leaving formatted templates to the archives. The solution is adopted in Austria, where the regulator and the regulated joined forces to turn the tables on the template-driven model and use new technologies to create a new regulatory value chain. The initiative is based on greater harmonization and integration of data within banks as well as greater integration of the IT systems of the supervisory authority and the supervised entities. The way it works is through a buffer company, called Austrian Reporting Services GmbH (AuRep), which is co-owned by seven of the largest Austrian banking groups, representing 87 percent of the market. This allows cost-sharing of compliance as well as standardization of data collection. Granular bank data sets are captured automatically for supervisors to interrogate in whichever way they want, whilst the banks retain control over their commercially sensitive data, maintaining only the so-called ‘passive data interface’ on the AuRep platform.
Use of distributed ledger technology might be the future solution. It is believed that satisfying regulatory demands can be made cheaper and more straightforward via distributed ledger technology as regulatory reporting has a transformational effect on the regulatory value chain. The study notes, related challenges can be overcome by utilizing distributed ledger technology, which has the capabilities to increase data quality and reduce manual effort because of its unique combination of characteristics. Moreover, it enables real‑time data reporting. Its main characteristics include transparency, immutability, a single source of truth and programmable smart contracts, which lead to the facilitation of regulatory reporting.
[1] Professor and Director (Training), BIBM ([email protected]).
