Data quality, consistency, reconciliation and lineage is now top of mind for both regulators and the financial services firms they oversee. That’s according to subject matter experts at Wolters Kluwer’s Finance, Risk & Reporting business who are predicting an increased focus on data structure and management for 2018. Whereas regulatory requirements were previously centered on firms submitting static reports at a specific time, in the correct format, there is now set to be an increased appetite for more detailed and granular data to gain deeper insight.

“Financial services firms have been building solutions to address the onslaught of regulatory requirements that have been enforced on them over the years. These are often comprised of numerous technologies, inflexible technology support, overlapping but variant functionality and discrete independent data models that create a tactical legacy that is costly and inefficient to maintain,” notes Rajat Somany, Global Head of Strategy, Product and Platform Management for Wolters Kluwer’s Finance, Risk & Reporting business. “This has been a problem which firms have had to find workarounds for but those approaches are becoming increasingly insufficient due to a gradual but significant step change in regulators’ mind-sets. Banks would now be well advised to implement systems that allow them to satisfy regulatory demands that are increasingly focused on obtaining meaningful data assurance as opposed to receiving static reports.”

Regulatory drivers contributing to this trend include the Basel Committee on Banking Supervision's Standard Number 239 (BCBS 239). The objective of BCBS 239 is to induce banks to improve the way they define, gather and process risk data to enhance their ability to manage their risk positions within their risk appetite. Adherence to the principles will result in wide-ranging changes to the way banks manage risk and hence their business. In many cases modernization of data management and internal control procedures is required.

AnaCredit (Analytical Credit Datasets), meanwhile, requires firms across the Eurozone (plus some other countries on a voluntary basis) to deliver granular credit and counterparty information. It introduces a significant change in the amount of data that is required to be reported, and on such a frequent basis — daily in some cases. All affected firms will be expected to have up-to-date expertise around data requirements and local discretions, as well as processes in place to monitor further stages that could affect both their single and multi-country operations in the future, Wolters Kluwer’s experts note.

“The demands of International Financial Reporting Standard (IFRS) 9 and the Current Expected Credit Loss (CECL) standard also contribute to the need to up the focus on data management. The shift in the treatment of impairments from an incurred-loss model to one that involves measuring expected credit losses, will mean substantial adjustments to data management systems,” adds Jeroen Van Doorsselaere, Vice President Product Management, Global Finance & Risk for Wolters Kluwer’s Finance, Risk & Reporting business. “Principles and procedures for classifying assets in terms of credit quality and calculating losses likely to accrue from them will have to be developed. Once in place, the procedures will have to be applied to every asset on the balance sheet. Finance, Risk and Reporting will become truly integrated as the start date for the new CECL standard approaches and we see the implementation of IFRS 9. A truly integrated process ultimately provides the best foundation for a bank’s Management Information System.”

Regional developments

Regional developments are likely to include an end to the relative dry spell for North American regulators. “We have already seen this in the U.S. with the delay of the phase-in of certain capital rules for non-advanced approaches banks. This freeze comes as the U.S. regulators are considering much demanded (most notably from the American Bankers Association) simplifications of the capital requirements,” notes Todd Lawrence, General Manager of Wolters Kluwer’s Finance, Risk & Reporting business in the Americas. “The Federal Reserve also has made statements recognizing the impact of the new current expected credit loss model to accounting provisions and, consequently, retained earnings and regulatory capital. They are therefore considering separately whether to make adjustments to the capital rules in response to CECL and its potential impact on regulatory capital.”

Additionally, the finalization of the post-crisis reforms to the Basel III framework by the BCBS has already been fully endorsed by the Federal Reserve. This only strengthens the expectations of a revised framework in both the U.S. and Canada, Lawrence says. Wolters Kluwer’s experts also note that regulators are shifting, or expanding, their focus from the largest Tier 1 banks to mid-size banks. “These banks are heavily exposed because of highly manual processes and key person risk,” Lawrence adds. “In Canada, meanwhile, banks will be busy implementing the Basel Capital Adequacy Reporting changes to include IFRS 9 related details and remaining Basel regulations such as the Total Loss-Absorbing Capacity (TLAC) standard.”

The Asia Pacific (APAC) region will also prove to be busy when it comes to regulatory efforts to increase consistency and transparency. “For the first time in many years, both TheAustralian Prudential Regulation Authority (APRA) as well as The Monetary Authority of Singapore (MAS) decided to completely revamp their key financial position reports, impacting all supporting forms, and requiring multiple new attributes, calculations and aggregations,” says Wouter Delbaere, Market Manager, Regulatory Reporting, for Wolters Kluwer’s Finance, Risk & Reporting business in APAC. “While APRA recently finalized its requirements and deadlines, we are expecting MAS to achieve the same by early 2018.”

Other regulators across APAC have also indicated that many changes are on their way, with The Hong Kong Monetary Authority, for example, announcing the impact of IFR9 and Interest Rate Risk in the Banking Book (IRRBB) on regulatory reporting in Hong Kong.

The European Union’s banking sector, meanwhile, faces a revised Capital Requirements Directive and Capital Requirements Regulation, CRD V and CRR II. “In a 500+ page package these revisions to CRD IV and CRR are likely to stretch significant regulatory change into the next decade,” Van Doorsselaere warns.

“Given the plethora of regulatory drivers globally, financial institutions’ senior management teams will be looking for ways to enhance their risk management and decision-making processes internally,” Somany adds. “It’s safe to say that data quality, consistency, reconciliation and lineage will remain key for regulators and banks throughout 2018. And banks who want to ensure a competitive advantage will adopt emerging technologies, such as RegTech, and business models to equip themselves with the strategies and capabilities needed to address these challenging regulatory changes.”