Key challenges of regulatory reporting

The regulatory reporting process requires collaboration between regulators and the firms they oversee. This has at times been problematic, as there is a natural barrier between firms providing data points and the regulators scrutinising them.

Today, regulatory reporting has become sufficiently complex that the authorities want to engage in open dialogue with regulated firms. A two-way conversation ensures that any regulations are the result of collaborative effort and will therefore address poor reporting and make better use of data in the long-term.

As this conversation continues to unfold, firms will need to pay close attention if they are to enhance their regulatory reporting and avoid enforcement action. Our polling reflected this sense of urgency, with over 70% of respondents indicating that they have already allocated a medium or high budget to support data management requirements.

Key forces at play

There are five key forces that will continue to influence the development of the regulatory landscape:

Asymmetric data: there is always a gap between the data points requested by a regulator and those provided by firms. Organisations will therefore need a better understanding of what regulators are really asking for.

Reactive oversight: the data received by regulators is always ex-post and not in real-time. To counteract this, firms will need an adaptive system that can react quickly to oversight requirements.

Ethical conundrum: firms have an ethical obligation to manage regulatory reporting because failure to do so has far-reaching implications for the wider financial services industry. Regulation therefore needs to manage risk in an effective way without killing market freedom and competition.

Regulatory collusion: if professional boundaries between employees for regulators and their industry counterparts become blurred, this should not result in unwarranted changes to regulation, which dilutes their effectiveness and anticipated benefits.

Collateral consequences: regulation has to be in the interest of the taxpayer. This means that regulators need to consider the consequences both of deregulating the market and also of excessive regulation, which will reduce competition and impact public interest.

Main challenges

A common issue in regulatory reporting is that firms have to adapt IT ecosystems as they expand or as the wider industry undergoes changes. This invariably creates gaps in IT systems that support core workflow, which means operational teams have to find ways to bridge these gaps by building their own data sets. As a result, companies end up with data that is either stale or unavailable for decision-making – a situation that is especially detrimental to regulatory reporting.

Another key challenge for firms under greater scrutiny will be working with legacy systems that are often a decade old and lack the data points required for modern regulatory reporting. We saw this after the go-live of MiFID, where the requirement for data was greater than what firms could actually facilitate.

While in-house solutions have certainly been a popular choice over the last decade, managing these systems internally raises challenges and complexities of its own. Many firms with in-house systems have struggled with a lack of data transparency, data lineage and issue management; others have discovered that continually adapting these solutions – which are often rigid and inflexible – to meet multiple iterations of regulation is a substantial and time-consuming task.

Firms who still rely on in-house solutions and legacy systems should be especially watchful that failing to modernise presents the following regulatory reporting challenges:

  • Insufficient governance
  • Poor integration of the technology ecosystem
  • No clarity on the golden source
  • Limited control of master data
  • Reduced data integrity
  • Operational risks of end-user automation
  • Incomplete workflow and case management
  • Inaccurate or stale management information
  • Gaps in the audit trail
  • Lack of a strong regulatory relationship due to misinterpretation of risk
How can technology enhance regulatory reporting?

Over the next three to five years, the most successful firms will be those who incorporate technology to further automate their data management processes. There are six key things for firms to consider as they undergo this transformation:

  • Centralising data: because there are so many interrelated parts in a firm’s core workflow, managing data via a central source, such as a data lake or warehouse, will be the most effective option
  • Project management: regulatory data projects have many layers of complexity and should be managed by subject matter experts
  • Change management: regulation is an issue that touches many different areas of a business and, as such, those areas need to be informed of their role within the overarching process
  • Process governance: the systems and processes we set up today might not be fit for purpose in the future. This means that we need stringent controls in place to manage potential changes
  • Skills and Knowledge: firms will benefit from upskilling all staff who are involved in the regulatory reporting process
  • Regulatory hub: to cope with evolving regulations, firms will need a regulatory hub directly incorporated into the solution

Above all, firms will need a consolidated, rules-based platform which not only ensures data extraction, preparation and integrity but also allows for appropriate sign-off before submission to the regulator. Such systems carry additional benefit by freeing up internal resources to focus on other business activities. Respondents to our polling also recognised this, with almost 40% looking to enhance data management through external IT automation.

As firms embrace technology to manage these issues, senior decision-makers should be cognizant that they should only partner with third-party vendors who have a proven track-record, are reactive to client needs, and have a high degree of control and transparency.