Regulatory reporting automation: mid-size banks face increased regulatory scrutiny

Reg reporting automation: mid-size banks face increased regulatory scrutiny

As regulations evolve globally, data has become both an essential currency and a pain point for financial institutions.

Dries Verboven, Americas market manager of regulatory reporting for Wolters Kluwer’s finance, risk and reporting business, examines how automation and the right approach to technology can provide firms with some much needed help.

Regulatory report submissions involve more frequent, complex and granular data requests, and require calculations that draw on multiple business functions across finance, risk and treasury. In fact, a recent Wolters Kluwer survey of banks worldwide reveals that 60% of them cite achieving data requirements as their main compliance challenge.

Despite these trends, many banks continue to pursue largely manual regulatory reporting approaches that seem designed for a different era, and that each year look more likely to result in problems and lost opportunities. Just 17% of the institutions surveyed by Wolters Kluwer claimed to have the right systems and procedures in place to support regulatory compliance efforts. The remaining 83% said they were planning to develop suitably robust systems and procedures in light of global regulatory challenges.

This transformation will be necessary for banks, because manual strategies are resource intensive, susceptible to human error, and struggle to generate the required audit trails and transparency. With regulators shifting their focus from the largest tier 1 banks to smaller and regional institutions, mid-sized banks can expect increased regulatory scrutiny – including the risk of having to refile reports, creating additional overheads – and reputational damage.

The automation edge

Regulators are placing greater emphasis on the qualitative aspect of report automation. It is no longer sufficient to just have the right answer; banks must also explain how the answer was derived. Banks need to demonstrate quality of data and are discouraged from using manual processes in regulatory reporting and other important business functions.

By automating the various stages of regulatory reporting, from data acquisition to aggregation, regulatory calculations and classifications, banks can enhance the accuracy of reports and create a clear audit trail in which the entire data flow leading up to final reported numbers is visible.

Automation also facilitates the centralisation and harmonization of data from the various organizational silos (e.g. finance, risk) that need to contribute to regulatory reports, creating a single source of truth that simplifies the sourcing and verification of data and underpins all reporting activities. This is why regulatory reporting has been identified as one of the areas ripest for digital disruption, and RegTech one of the top emerging trends in financial technology. Banks can also leverage this valuable information for management reporting and better strategic decision-making.

Bank size matters

Banks may be aware of the need for automation, yet for various reasons remain hesitant to take the plunge. In many cases it’s not as easy as buying and installing a solution off the shelf; costs, internal barriers and the difficulty of finding the right technology partners may all hold institutions back.

Mid-sized banks tend to face particular challenges. They are required to report more than smaller institutions, yet may lack the resources and formalized processes that can make it easier for large banks to automate. Having generally smaller teams, they are more susceptible to key person risk, in that reporting responsibilities may rest with just a handful of people who have built up manual processes over time with which only they are familiar.

Incremental automation as best practice

The good news is that automation doesn’t necessarily involve a massive, expensive or disruptive implementation. Requirements and infrastructure differ by institution, and banks are at various stages along the automation journey. This enforces the argument for the adoption of a modular solution consisting of various components that can be combined and deployed flexibly to address different needs.

A modular solution enables mid-sized institutions to automate in an incremental way, for example starting with the general ledger then moving on to more granular calculations and financial instrument data. While the process may be incremental, the results are immediate. Each stage of automation frees up more resources to support future implementations, creating a virtuous feedback loop. More transparent, accurate data also pays dividends in terms of risk and performance management, and contributes to sounder decision-making across the enterprise.

Arguably the modular and incremental approach is the best practice on the technology side, but it’s important this is supported by the right personnel strategies.

It’s essential to cultivate a degree of buy-in; the owners of manual processes should be convinced that automation doesn’t represent a threat, but a chance to refocus their energies on higher-value contributions to the business. Creating a governance structure and a center of responsibility for the usage and control of data across various business segments is also key. In larger banks this tends to rest with the CIO. Mid-sized banks should empower IT to the same degree to facilitate data governance across finance, risk and reporting.

In essence, even though they may face more challenges initially, mid-sized institutions should not hesitate to grasp the automation opportunity. The pace of new regulatory requirements may be easing, but regulatory complexity, time to compliance and regulatory scrutiny are not.