A Digital Opportunity to Transform Financial Reporting

Co-authored with Viswanathan (Vishu) Namasivayam

The Importance of Reporting

Financial regulators rely on timely and accurate reporting by financial institutions as an assurance of the organizations’ adherence to the regulations, laws and guidelines in order to prevent, detect and address deviations, illegalities and nonconformities in the organization’s operations. Furthemore, certain regulatory reporting information is also used for public disclosure so that investors, depositors, and creditors can better assess the financial condition of the reporting institutions. The importance of financial and regulatory reporting is best understood from the range of consequences resulting from non-compliance - these may include legal action, impact to brand reputation, financial fines, temporary suspension to permanent closure. In 2008, the global financial crisis deepened the scrutiny with which financial institutions are subject to by regulatory bodies. In present reality, adequate reporting and compliance management of financial institutions are fundamental necessities for safe operation within the financial industry and non-compliance is not an option.

Traditionally, regulators have taken a compliance-driven approach with supervisory functions in mandating submissions of reports through hardcopy or PDF. The gears are now shifting to a risk-based approach to measure systemic risk to the economy from different organizations. The stringent requirements and increased oversight, together with the availability of massive volumes of underlying data has forced regulators and financial institutions to find technology-based solutions to (1) improve accuracy in compliance and reporting; (2) assess their risk management practices and risk mitigation controls; and (3) drive down the cost of regulatory reporting. The increased frequency of data requests and granularity of data has driven financial institutions and regulators to embark on digital transformation initiatives to progressively reduce duplication and to automate data submissions.

New Landscape

The financial landscape has been changing. Pre-pandemic, in a 2016 McKinsey & Company article, Piotr Kaminski and Kate Robu opined that “the traditional compliance model was designed in a different era and with a different purpose in mind, largely as an enforcement arm for the legal function. Compliance organizations used to promulgate regulations and internal bank policy largely in an advisory capacity with a limited focus on actual risk identification and management”.

The shift away from the “traditional compliance model” has already been taking place. Regulators are now interested in access to granular data and direct regular data flows. In 2017 The National Bank of Rwanda developed guidelines, consistent definitions and fully automated the data collection mechanism where granular data from financial service providers is regularly updated into the data warehouse. The review and automation was undertaken in response to a growing demand for financial inclusion data from within the Government of Rwanda and as part of strengthening and automating their data systems. The Rwandan banks responded positively to the National Bank of Rwanda’s process of automated data collection. The reason for such buy-in possibly being the harmonization and streamlining of each of the respective banks’ own data processes through this system of automated data collection. The end result? A 600 strong, regulated stakeholder network pushing data every 15 mins through a flexible system that can easily take on additions and modifications of business definitions.

The Monetary Authority of Singapore (MAS) too has been constantly expanding the scope of reporting requirements. In 2018, MAS announced its objective to collect data in machine-readable format to reduce duplication in data submissions by financial institutions. The additional granularity of data is set to pose sizeable task for regulatory reporting and financial institutions should prepare themselves to adapt to this dynamic regulatory reporting regime.

Similarly, the Bangko Sentral ng Pilipinas (BSP) has made big strides in aligning its prudential banking regulation with international standards of risk-based supervision. As part of its effort to strengthen its supervisory capacity and enhance compliance, an API pilot was put in place in 2018 to improve the quality and timeliness of supervisory data. It provides a machine-to-machine link between the core banking systems of banks and the system of BSP. The API pilot allows the 19 participating banks to submit high-quality granular data digitally, and automatically enable BSP staff to make data validation faster and analysis sharper by generating customized reports for supervisory and policy development purposes in different formats.

The transformation from traditional regulatory reporting to regulatory data submissions is truly not farfetched. In order to materialize, the transformation needs to occur in 2 main areas: (1) an open taxonomy standardizing the data required by regulators and (2) Regulatory Technology (RegTech) solutions that supports automated submission of data to regulators. The open taxonomy provides a common data definition and act as an enabler to consolidate and automate the processes within the financial institutions. While RegTech helps in consolidating the data from the various enterprise systems as a single source of regulatory data allowing it to be safely accessed by the regulators without any manual intervention. An example is Appiax, which simplify regulatory compliance by turning written regulations into digital compliance rules and manages it through an open API.

The necessity to digitalize has been amplified due to the implications of the Covid-19 pandemic where the need to operate in environments that are low on human interaction is of public interest. This is an opportunity to not only revitalize the front-end, customer-facing aspects of banks but also, to establish scalable and robust digital reporting solutions. We need to captalize on the current reality of low-touch necessity and the fact that compliance is the only viable option to financial institutions. The purpose and approach of non-digital and legacy processes need to be challenged and a paradigm shift from “wet ink” documents in today’s digital norm awaits.

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A Digital Opportunity to Transform Financial Reporting

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