David Marriage, Head of Strategy & Business Advisory at IMGROUP and Suranjan Som, Joint Practice Head, Business Intelligence at IMGROUP
Ever since the advent of Sarbanes Oxley in 2002, financial and accounting regulations have come thick and fast on both sides of the Atlantic. Few could argue against the need for regulation in light of global financial events over the last 10-15 years, but on the downside, it does impose a greater operational and financial strain on a wide variety of organisations and this burden only seems to increase with every new regulation.
A 2013 report on the cost of compliance by Thomson Reuters revealed that over 80 per cent of compliance professionals globally expected an increase in regulatory information volumes this year, yet a third of respondents expected compliance budgets to be the same or less by the end of the year. Given the pressures already being felt by businesses due to increased regulation, it’s clear a new approach must be considered. The question I would encourage companies to ask is whether a large financial outlay on new data management processes is really necessary with every new regulation or should they be looking at a greater outlay now, to reduce the long-term costs associated with compliance?
Graham Brough, chief executive at the Centre for Economics and Business Research recently said at the launch of their new report, “Data on the balance sheet” that you can’t put too big an emphasis on the importance of proper data management. According to Brough the 3 principle reasons businesses should value data are regulation, competition and globalisation; three very relevant concerns for financial institutions.
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Increasing regulation is not a recent phenomenon, but the global financial crisis exposed a severe need for the accounts of financial services firms to be seriously and closely scrutinised, which has therefore served to accelerate the introduction of regulation. Some of the most recent regulatory frameworks the financial services industry must concern itself with are Mifid II, Basel III, the Financial Reporting Standard (FINREP) and the Common Reporting Standard (COREP) – the latter two being designed by the European Banking Authority (EBA) to improve risk identification and management for cross border institutions, and facilitate peer reviews.
These regulations will present some major challenges which hinge on the need for financial institutions to undergo much more extensive reporting across a wider range of areas, as well as going into a level of data granularity that they have never been required to present before.
Basel III for example, is a regulation centered on the quality of data and the way it is managed. Brough explained, “If you have unclear data, or untransparent data in terms of its reporting, then higher capital requirements will be placed on you.”
COREP will be the easiest of the frameworks for banks to comply with, largely because most financial institutions already have about 80% of the data that they will be required to report. That is, they are either required to report it (or something similar) to a regulator under existing legislation, or they are at least aware of how and from where to source it. All COREP compliance will therefore really entail is for organisations to tidy up and bundle their existing reports, which is not difficult, and makes sense from a data perspective.
However, concerns come into play around FINREP, which in its current guise will require banks to present data that they quite simply do not have, or of which they generally have as little as 12%. The contrast in the challenges that financial institutions will face in relation to these two frameworks should push the powers that be to think about how easy it would be if they always had data mechanisms in place to adapt to any new regulation! The old adage of the need to speculate to accumulate rings true here, but to paraphrase; banks need to speculate to save when it comes to compliance.
Developing a data strategy
Currently financial institutions are looking at the onslaught of regulations, the need for better management information and decision support, financial reporting and the management of risk as individual projects. However, Mifid II, Basel III, COREP and FINREP all overlap massively in terms of the data they require to be reported. Their need for greater transparency and accuracy means raw data is required to be captured at the lowest possible grain and financial institutions need to be able to analyse this raw data at the same level of granularity that regulators will be.
If financial institutions undertook data management strategically, rather than on a project by project basis they could deal with each new request as part of an overall programme that will add value to the business. Each new regulation, question and data requirement will be easier to deal with because all the right information has been captured at the right level of granularity in the first place.
Unfortunately financial institutions’ infrastructures have evolved over time into complex silos, making holistic data management intrinsically difficult. For too long, banks have simply added layer upon layer of functionality and applications to an infrastructure already creaking under the strain.
Rising above these silos and getting out of the infrastructure weeds will enable a financial institution to look across the entire businesses’ data and understand it. This means that no matter what the regulator asks, the business is in a much better position to deal with the unknown.
Speculating to save
Although data management in regulatory terms is often viewed as a burden, there are rewards to be reaped for those organisations that collect and use their data wisely. Financial institutions must weigh up the relative costs of upgrading for each regulation, compared to doing a complete overhaul of their systems and processes. Let’s face it, it’s worth investing £4bn now, if it will save you £4bn per year on regulation in the next few years – those are the volumes we’re talking about here.
When looking to maintain a competitive edge, data can be one of the most powerful tools in a company’s arsenal for business intelligence. By eradicating siloes in data banks can face the onslaught of regulations strategically rather than tactically, saving them an incredible amount of money and ensuring that they are compliant and efficient.