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How a lack of data can cause a crisis in FS governance

How a lack of data can cause a crisis in FS governance

Alister Esam, founder and CEO, eShare

Many financial services (FS) firms are operational in a number of countries. Barclays has a presence in more than 50 countries around the world, and that is not untypical, especially for bigger organisations. Globalisation has made such expansion easier than ever, and the benefits of expanding internationally far outweigh the costs involved in doing so.

But as FS firms expand into new territories, their structure inevitably becomes more complex. This has meant that multiple subsidiaries are commonplace in modern FS business structures, a complexity that has led to a variety of governance issues.

When a company has hundreds of subsidiaries, extending its corporate governance to them all can be a real challenge. How can directors be expected to know what is going on in each subsidiary at any given time, and is smarter use of data the key to addressing subsidiary governance?

Governance in FS

As a result of the 2008 financial crisis, governments all over the world set up review programmes to look at why it had occurred and what could be done to prevent it happening again and in many cases governance was found wanting.

The financial crisis also increased the need for better reporting on corporate legal entity data, with regulatory reform in US taxation law (FATCA), and the European Market Infrastructure Regulation (EMIR) both requiring additional data.

This has meant governance is more in the spotlight than it has ever been, and for any organisation that gets it wrong, the penalties can be huge. There are also the potential long-term brand implications if a bank is perceived to be behaving improperly or incorrectly.

 Struggling to manage entities

But the complex structure of most large FS firms means it is also getting harder for them to keep track of their entities.Large corporations will have hundreds of smaller entities, so might not even aware of them all, never mind whether they are being governed effectively. So it is hardly surprising when sometimes they fall foul of local compliance regulations.

Yet addressing this is a significant challenge, with a lack of consistency as to how a governance policy is applied amongst an organisation’s subsidiaries and a lack of control as to how the entities are approaching the task.

The solution is a subsidiary governance framework and regular review of this policy and audits of subsidiaries to check they are compliant. This allows subsidiaries to meet their own local regulatory requirements, while still adhering to the overall principles and values. But further to this, a deeper understanding of their entity structure is required, and that is best achieved via smarter use of the data held on these entities.

Data and entity management

One area of modern business in which data has arguably been under-used, is in the governance functionOrganisations need regular and real-time access to entity information and data, such as when entities were formed, or when the country that entity exists in requires financial information. Furthermore, combining different data sets allows for deeper analysis and greater insight and intelligence, which in turn allows for a much better understanding of entity structure and governance requirements.

Yet traditional entity management software is little more than a database, and the reports one is able to generate from them are not flexible enough to factor in the type of information generally required.  Given that directors are personally liable for entity compliance, a lack of ability to access the required data is a significant flaw.

Improving entity management

Many organisations deploy entity management software, but most system are not fit for purpose. An entity management system must be updated regularly and efficiently – automation can play a pivotal role here – so that users have one source of truth, but data must be centralised and not siloed, and be quick and easy to access.

Access to data is absolutely critical in ensuring good subsidiary governance. An effective entity management platform must allow a director or company secretary to personally remain on top of each entity, and any upcoming regulatory requirements.

In fact, the term ‘entity management’ may even be phased out, with people using instead a ‘subsidiary governance system’. This enhanced system will track whether a certain entity is compliant or not, but also whether the board in that entity is operating as it should. A director could see for example, a heat map of all that organisation’s entities, and be able to tap on each one to check compliance, whether accounts have been filed and whether board meetings have been taking place.

This digitising of all entities can have a significant impact on subsidiary governance. Such platforms are highly effective for managing large volumes of data and can present the required information in an easy-to-understand method and via an app on a user’s mobile or tablet, if required – given the penetration of smart phones and tablets this feature should not be under-estimated. Sometimes this must be presented externally too.

Subsidiary governance in changing political times

In a time where politics and the economy is highly uncertain, with long-established trade alliances being dismantled and new ones eventually forged, it means subsidiary governance in FS will becomemore complex than ever.

The key to achieving effective subsidiary governance is in smarter use of data, and proper access to that data. Data has transformed so many other elements of FS, it is high time that it is used to greater effect in governance.

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