The regulatory reporting landscape has evolved significantly over time. The 2008 financial crisis marked a big change in the regulatory reporting landscape for financial institutions, with supervisors demanding ever more detailed and frequent reporting. The collapse of Lehman Brothers highlighted how important it is for the stability of the financial markets and the global economy that banks put in place a sound framework to monitor their exposure to risks and consistently and regularly report on these exposures.

Over the years, reporting standards have evolved, with regulators expecting ever more frequent and detailed reporting. The results are then used by authorities to better shape the regulatory agenda and to predict potential areas of weakness in financial markets. Keeping up with these reporting expectations remains a challenge for financial institutions. 

A regulatory reporting framework

In order to adequately meet these challenges, institutions should have in place a well-defined regulatory reporting framework to ensure the completeness, accuracy and efficiency of reporting processes. Such a framework can assist institutions in setting up a sound reporting architecture, allowing them to exploit the full potential of their reporting tools and methodologies.

In order to be successful, particular attention should be focused on optimising the regulatory reporting process through automating the aggregation and reconciliation of data as much as possible. Bringing automation into regulatory reports improves the quality of these reports and allows banks to allocate more time and resources to the analysis and interpretation of the results. Other important elements include complete and clearly documented processes and excellent communication between different stakeholders. The overall aim is to avoid misstatements and unintended consequences to the extent possible.

To achieve this, we have identified three key challenges which institutions need to overcome:

1.     Significant manual interventions;

2.     Inadequate IT architecture;

3.     Substantial complexity and interconnectedness across business areas.

Manual interventions and operational risk: still a challenge in a digital world

In the banking area, weaknesses in the quality of reporting can be minimised by automating production. Each period, the same templates need to be filled and a process lacking automatisation with a high level of manual intervention is susceptible to significant errors in consistency. Plus, if the process is followed by a weak reconciliation check between different data streams, it will result in inaccurate regulatory reports. 

The overall aim of automating reports is to reduce human error and ensure that adequate resources are available to interpret results, perform quality controls and influence the business and strategic decision process.

Renewing data architecture and IT infrastructure

Achieving the desired level of regulatory production automation requires an evolution in the supporting data architecture and IT infrastructure. First, the data architecture needs to progress in order to make sure that required data is available and centralised into repositories. Second, the reporting solutions should be capable of integrating various data sources. These evolutions will simplify production by allowing a direct mapping of the various data elements into the defined regulatory templates.

The key impediments to these evolutions are: (1) the costs related to these changes; (2) the potential impacts these changes could have on other processes within the bank; and (3) the difficulty to work with legacy data and IT architecture.

Cutting through complexity

Given the complexity of the exercise, banks should have a dedicated team in charge of regulatory reporting production. This dedicated team should act as the competence centre for reporting production and should be adequately resourced from both an infrastructure and human resources perspective.

Generally, regulatory reporting is the responsibility of the Finance department in collaboration with the Risk department as validator. This separation between control function and production function is a key element of a well-functioning three-lines-of-defence model and should be seen as best practice. Of course, internal audit as the third line of defence further ensures the effectiveness and accuracy of the reporting process.  

The key is developing a competence centre where the right cross-organisational resources are engaged to ensure compliance with regulatory requirements, the quality of data and consistency of business specificities. 

To summarise; this competency centre should: (1) ensure the comparability and measurement (IFRS or local GAAP) of reporting by business units and work with them to help recognise their activities; (2) perform micro/macro analysis and provide quality reporting to senior management; and (3) carry out continuous training in order to stay ahead of the regulatory curve.

To successfully implement a fit-for-purpose regulatory reporting framework, institutions must consider the combination of these three factors.

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