By: Trans World Compliance

Regulatory reporting is an integral part of banking and finance. It helps financial institutions to ensure that the financial markets are well-functioning, efficient and effective for all participants. This article will provide an overview of its importance, how to improve it within the companies, and the risks of not complying.

In this article we will discuss:

• What is regulatory reporting?
• Why is regulatory reporting important?
• What are the risks associated with regulatory reporting?
• How to manage the risk associated with regulatory reporting?
• How to improve regulatory reporting?
• How can Trans World Compliance help banks?
• In conclusion

What is regulatory reporting?

Regulatory reporting is the process of documenting information about a company’s activities and operations. It includes everything from internal audits to external reports. The purpose of reporting is to ensure that all relevant information is available to those who need it, and that all aspects of a business are operating according to the law and best practices.

The first step to making sure that a bank complies with regulatory reporting is to figure out the laws and regulations that specifically apply to it. Then, there must be certainty that everything is being done to meet those requirements. In our blog ‘Regulatory compliance for beginners’ we list some of the acts that are currently in place.

In any case, it is likely that banks are already doing some type of regulatory reporting; simple things like keeping records of transactions and processes, having well-implemented procedures, and formalized training, are often disregarded.

Why is regulatory reporting important?

Regulatory reporting could be thought of to make sure that banks comply with all the laws set in place. However, compliance is not –and should not be looked as– only legal requirements since it includes ethical standards and social responsibility.

Every element of a bank, whether it is employees, contractors, suppliers, or customers, should comply with the regulations, and the banks must make sure that no law or guideline is violated, even if it is unintentionally.

To comply, policies must include clear procedures to help banks identify risks. They should also describe strategies that will allow mitigation of those risks, and implementation of controls that will help ensure that those risks continue to be mitigated.

There are several reasons that illustrate why regulatory reporting is important. Here is a list of a few of them:

Avoiding legal and economic repercussions

When a bank complies correctly with all the laws, it stays away from any possible legal repercussions that, when found guilty, usually come with large fines. This is perhaps the clearest benefit in regulatory reporting. Compliance policies should not be taken for granted, as they are a way to show that banks are committed to comply with regulations of the industry as well as ensure that all the employees do as well.

Accountability: when and how it happened

Of course, the ideal situation is that nothing goes wrong. However, any bank should be prepared for the case when something does and have backup plans. If regulatory reporting is also available as data, it will be easy to trace back and pinpoint exactly what happened and why. This information will be able to reassure stakeholders on the integrity of the bank's regulatory procedures as well as help the bank adapt.

Internal confidence and external trust

What could hurt a bank even more than the economic repercussions is that customers lose trust in its ability to handle their information; a bank cannot survive without clients, and a cracked reputation will not help getting new ones. On the other hand, internal confidence is also important for any bank. Without it, people will not feel safe doing their jobs. Therefore, regulation is so important; it gives everyone the assurance that everything is done correctly and safely. 

 

What are the risks associated with regulatory reporting?

When we talk about risk, from a regulatory reporting perspective, we are talking about any event that might have adverse effects on a bank, whether it is its projected financial condition, which includes diminished capital and liquidity, or its resilience, meaning the bank’s ability to resist periods of stress, long or short.

There are several categories of risks for banks. We will develop four of them –operational, compliance, strategic and reputational–, which are associated with preparing, reviewing, and filing regulatory reports. These categories should not be thought of as individual risks, as they are not mutually exclusive, and most of the time banks are exposed to multiple of them in an interdependent and correlated manner. When examiners evaluate a bank, they will be aware of this interdependence, and assess what can significantly elevate the risk within the bank and its products.

Operational Risk

The term operational risk refers to the risk to current and future financial performance arising from inadequate or failed processes, people, technology, or systems. It includes risks associated with poor quality control, employee error, theft, fraud, data loss, cyberattacks, natural disasters, and regulatory compliance issues.

All the elements in the regulatory reporting process, such as preparation, review, and reports, are associated with operational risk. Any failure in the system, or the bank's processes and procedures, as well as human error and fraud, could lead to inaccurate information in regulatory reporting.

For example, banks usually use an automated system that allows them to prepare, review and send regulatory reports. However, what would happen if this automated system is not programmed correctly, or it does not have the proper controls, or it has not been updated or modified lately to meet the newest safety requirements? Well, the bank’s operational risk exposure would be increased. Having an automated system might reduce manual errors, but it has its own risks that every bank should prepare for.

Compliance Risk

Compliance risk is the risk related to the violation of laws and regulations, and nonconforming with the set guidelines, standards, policies, and procedures. Having an elevated compliance risk means exposing the bank to potential legal and economic repercussions, such as fines, payment of settlements, and voided contracts.

Strategic Risk

Strategic risk arises from making bad decisions, poorly implementing business decisions, or lacking, within the bank, the necessary responsiveness to the changes made in the banking industry. When regulatory reporting is done incorrectly, or inaccurately, the strategic risk of a bank may increase as the management will be using imprecise information to supervise the overall performance and condition of the bank.

Reputational Risk

Finally, reputational risk refers to public opinion and its effects on the financial condition and resilience of the bank. A damaged reputation could impact the bank’s competitiveness, as it would be increasingly difficult to establish new contacts, relationships, services, and customers. It may also be hard to continue securing the trust from customers and stakeholders, since it is a sign that the implemented protocols against data breaches, among other things, are failing. It is important to minimize the reputational risk, to attract and maintain stakeholders, investors and customers, and avoid any repercussions that may affect current and future earnings.

 

How to manage the risk associated with regulatory reporting?

To properly manage the risk associated with regulatory reporting, each bank must be aware of its size, complexity, and risk profile. This way, it will be easier to implement an effective and appropriate system for risk management that is able to identify, measure, monitor, and control risk. An effective system for risk management is what examiners usually assess, and some of the things considered are the policies of the bank, the processes, and the control systems.

There are several ways to approach the management of risk; here is an overview of some of them.

The Board

Managing regulatory reporting risk starts from the top. It is important for the board to set an example for the rest of the employees by establishing an effective and appropriate governance structure in an environment that is motivated to prioritize compliance that applies the current regulatory reporting requirements. Since it is usually the board, or relevant committees, that receive the regulatory reporting information, it is natural to use this to assist with the bank’s responsibility.

Examiners also review incentive compensation arrangements, and one of the things that is assessed is that these compensations are not incentives to file inaccurate regulatory reports. It is the board’s responsibility to ensure that incentive compensations are appropriately balanced and do not put at risk the bank’s safety.

Policies and procedures

Other important actors in regulatory reporting are policies and procedures. These make sure that the reporting processes, as well as the responsibilities of the personnel, are clearly defined to provide effective protection from risks. Having effective policies in place allows banks to identify responsibilities clearly, from individuals or departments that would have to prepare the regulatory reports, to those that would have to review them for accuracy and compliance with requirements before they are filed.

Putting in place policies and procedures for regulatory reporting is a delicate job; here are some things that must not be overlooked:

• Training requirements for the personnel.
• Assignment of responsibilities for preparing, reviewing, and filing reports.
• Requirements for reporting.
• Compliance with the laws and regulations of the industry.
• Guidelines for documenting the paperwork.
• Guidelines for selecting, using, and updating reporting software.
• Standards for data quality.
• Guidelines for changing processes with new or updated requirements for regulatory reporting.

Control systems

Control systems are used by bank managers to measure its performance and assess the risk and effectiveness ofthe implemented processes and procedures. They do this with information systems or functions, such as audits (either internal or external) and controls for quality. Often called the second line of defence, internal controls are assessed through the bank’s risk reviews to measure its effectiveness. The third line of defence is the audit program.

 

How to improve regulatory reporting?

The first step for improving regulatory reporting is to understand it, and once that is done the rest of the steps will follow easily.

For example, moving from a manual system to an automated one will remove the human errors that may contribute to regulatory risk. It is also a faster way to review and file reports, especially in a speedy industry such as finance.

 

How can Trans World Compliance help banks?

Trans World Compliance provides software solutions to simplify the compliance and regulatory requirements for US, Foreign Financial Institutions, tax regulatory bodies and governments.

3-step process

Our simple three-step process allows Financial Institutions to streamline their classification, remediation, and reporting process in a flexible, secure, and precise way.

Mitigate regulatory and reputational risk

TWC will help you navigate FATCA and CRS regulations swiftly and precisely with our jurisdiction specific rule-bases and XML generation engines that improve reporting accuracy and provide proof and evidence (reports) to regulators and stakeholders of the quality of your due diligence efforts.

Reduce the cost of regulatory compliance

Whether CRS and FATCA reporting is a cost center or a profit center to your business, you can leverage our technology to streamline and automate your current manual processes and allocate resources better to optimize process times, improve reporting accuracy, and reduce overall FATCA and CRS compliance costs.

Enhance your KYC for FATCA and CRS

Through jurisdiction specific intelligent rule bases (over 100 jurisdictions) let our solution perform a full discovery of your client data to help you unveil hidden indicia, data deficiencies (invalid TIN formats) and changes in circumstances, and via corrective actions understand the real status of your client base regarding FATCA and CRS.

 

In conclusion

We have reviewed the importance of regulatory reporting for banks: it avoids legal and economic repercussions, helps narrow down when and why errors occurred and maintains internal confidence and external trust.

We have also looked at the four main types of risks associated with regulatory reporting: operational, compliance, strategic, and reputational. These should not be thought of as individual risks, since most of the time banks are exposed to multiple of them in an interdependent and correlated manner.

Finally, we established the different actors that may contribute to managing the risk associated with regulatory reporting, from the board and management to the policies and procedures, to the different control systems. When all of these are working in an effective manner, risks are minimized and regulatory reporting is improved.