November 16, 2017
The Australian Prudential Regulation Authority is overhauling its core regulatory reporting requirements, which includes the modernization of the Economic and Financial Statistics data submissions required from Australian banks and various other financial institutions. Wei-Shen Wong reports on the challenges created by the reviewed submissions.
Economic and Financial Statistics (EFS) data serves as a sort of health report for Australia. Compiled by the Australian Prudential Regulation Authority (APRA), it provides key macroeconomic indicators for the country, mainly to help the Australian Bureau of Statistics (ABS) and Reserve Bank of Australia (RBA) to set economic policy. Trading firms can use this data to monitor Australia’s economic growth, create economic forecasts, monitor for bubbles, gain a snapshot of wealth, and look into investment activities in the country. The information that fuels these reports is provided to APRA by authorized deposit-taking institutions (ADIs), such as retail banks and credit unions. After the financial crisis, regulators across the globe realized that they lacked the granular data needed to maintain economic stability in challenging times. APRA decided to re-examine the information needed to create these reports, and on January 18 this year, together with the ABS and RBA, released the first proposal for a modernized data collection system for EFS data. After listening to industry feedback, APRA released a response report on August 23. The overhaul includes changes to balance sheet forms, finance commitment forms, and profit forms, as well as additional information for interest rates and credit data.
While these changes will focus primarily on banks’ retail arms, it means that resources could flow away from the investment side of the institution, or the two sides of the organization will have to work on building out more encompassing data platforms.
In a comment letter responding to the original proposals, Tim Sedgwick, country finance officer for Citibank Australia, noted that Citi’s local IT budget has been locked down well into 2018 with existing business-critical projects. Sedgwick said that although Citi is a “small market participant,” its dependence on multiple global systems across several reporting entities with retail, commercial, and institutional businesses may result in total project costs of up to A$15 million ($11.5 million) to implement all APRA’s proposed changes.
“We have not had sufficient time to undertake a detailed costing in the fashion requested by APRA, however, broadly it comprises A$3 million–A$5 million ($2.3 million–$3.8 million) local systems cost, A$3 million–A$5 million global systems cost, and A$5 million–A$10 million ($3.8 million–$7.6 million) human resource and consulting cost to build and test the new data collection and fully incorporate it into these systems,” he said.
After listening to industry feedback, APRA decided to provide more time for ADIs to seek resources—both internally and externally—to adhere to these new reporting standards, while building out their systems and establishing the necessary controls over data quality required, according to the response paper.
“Some of the reporting thresholds have been revised upward, including the requirement to report on cost/value of funds and margin data on the interest rate forms. The data quality elements of the proposed data quality standard and guidance have been combined into a revised reporting practice guide, which is being released for further consultation,” APRA said in its response. Although firms have a longer grace period now that APRA has extended the implementation deadline—with the regulator setting an initial implementation date of July 1, 2018—the pressure is still on, especially for larger banks, says Thomas Verlaet, senior product specialist in compliance data and solutions provider Wolters Kluwer’s finance, risk and reporting business in Sydney.
“For many new firms there are reporting thresholds in place, which means only larger institutions are impacted. The largest institutions will see a significant increase in reported data points—estimated to be up to an 80 percent increase compared to the current regime,” Verlaet says.
Abraham Teo, head of regulatory policy for the Asia-Pacific region at AxiomSL, says this data management and governance exercise will take some time, but will be manageable.
“Most of this information already exists somewhere in the organization, and it is just a matter of capturing it, making sense of it and putting it all together,” Teo says.
Teo’s colleague Andrew Wood, country manager for Australia at AxiomSL, adds that “financial firms will have to go back, almost to their front-office source systems and processes, and if their data attributes actually don’t exist within those systems, they have to go back and capture some of this information,” Wood says. “Some of the classic ones mentioned are loan purpose and mortgage origination systems.”
‘Far More Complicated’
In Citi’s response paper, Sedgwick added that the bank believes that the required data accuracy standard is “unachievable,” as it goes far beyond what is required of audited financial statement information. “We believe that the current proposal fails on a cost/benefit analysis, where the elements of timetable, accuracy, detail, and proposed collection methods make the new data collection a very expensive undertaking—for individual institutions and the industry as a whole,” he wrote.
Sedgwick added that the proposals are “far more complicated” for data collection, data management, and data reporting compared with Australia’s adoption of International Financial Reporting Standards (IFRS) accounting standards, which would typically be a three-year project for Australian financial institutions.
“As a foreign bank, for a project of this size, Citi generally needs at least 12 months’ advance notice simply to obtain regional and global planning and budget approvals, for the necessary staffing and IT resources required to undertake the data collection and data management aspects of APRA’s proposed changes,” he said.
The biggest criticism of APRA’s original plan from the industry was the “unrealistic” timeframe, which APRA is working with the industry to address and create more realistic implementation deadlines, and to simplify its requirements.
For example, APRA has eliminated an element of its original proposal to implement a “backward-looking parallel run,” which required firms to resubmit the data they had previously submitted with the existing forms, using the new forms. But respondents complained that the six-month backward-looking parallel run effectively moved the implementation date from mid-2018 to the start of 2018. Although APRA has now done away with that proposal, ADIs will still have to submit a forward-looking parallel run. This means they must submit the old and new reporting forms to APRA in parallel, or, at the same time.
The challenge here is being able to reconcile the information and make sure the information being submitted under the existing forms and the new forms tallies, says AxiomSL’s Teo. “They need to do this for at least four months. This is something we are trying to help our clients with—to come up with a reconciliation tool to be able to reconcile the old and new to ensure they are reporting consistent information to APRA,” he says.
“For example, if you’re reporting $1 million in assets under the old EFS, [to ensure] you are also reporting $1 million in assets in the new EFS.” In the event of any inconsistencies between the old and new EFS data, APRA is likely to come back to firms with more questions. The parallel run is APRA’s way of ensuring consistency as it migrates to the modernized EFS, but it is a challenge and could take more time and effort to reconcile the two, Teo adds.
Skin in the Game
Many banks contacted by IDM—including Westpac Banking Corporation and the Commonwealth Bank of Australia (CBA)—say they support APRA’s proposal and are currently working on making changes to be compliant with the modernized EFS data collection. A spokesperson for CBA says the bank “understand[s] the importance of meeting our reporting obligations, and we will be working to meet the timelines outlined in the response paper.” The head of regulatory reporting at a European multinational bank with operations in Australia tells IDM that their bank has created a centralized system to manage the additional data it will have to record to comply with APRA.
“We will have lots of different reports and different things to handle, so having one source of truth as opposed to managing it in siloes is much better. We have lots of divisions currently, and we are integrating it into one,” the source says. The executive adds that while the centralized system is already in place, the bank will only begin testing it for quality next year. And the need to change data architectures doesn’t just impact financial firms—APRA also intends to replace its data collection system, Direct to APRA (D2A), over the next few years.
APRA will commence industry consultation on the D2A replacement before the end of 2017, and given the EFS collection implementation timetable, APRA says the replacement of D2A might coincide with the first reporting periods for some of the EFS collection phases. A source close to APRA says the timeline for the replacement has not been finalized and will depend on the regulator’s engagement with the industry. “APRA is aiming to replace D2A and provide APRA and the industry with a refreshed and easy-to-use system that meets the needs and demands of modern business,” the source says.
With new regulations and standards, and existing rules under review, compliance is a moving target. APRA will continue modernizing and changing its requirements as it moves forward, and banks in Australia will have to accept that change is now a constant, and ensure they can manage changes moving forward. Still, there will always be pushback, and for justifiable reasons.
In Rabobank Australia’s comment letter, Adam Maynard, head of the bank’s capital management, external and regulatory reporting unit, noted that this is not “a non-trivial exercise due to the significant increase in the number of data points reported, as the data elements required are more granular. By design, banks are large complex businesses with formalized governance frameworks. Any changes to products, people, systems or procedures are required to go through rigorous review and approval processes. These multiple checks and balances are to ensure that all the required elements are properly thought through. The consequence of this is that the change process can take much longer than would be normally expected. Timeframes become even more extended if the scope of the works is extensive.”
And as Wolters Kluwer’s Verlaet notes, in many cases firms still take a siloed approach to regulatory change, especially if the regulation touches different aspects of their business, such as risk, finance, compliance or operations. “We urge the industry to take a holistic approach to regulatory change and avoid short-term tactical solutions. By looking at strategic solutions that address multiple requirements, supported by a common data architecture, banks can benefit from economies of scale, lower the cost of compliance, and be prepared for the regulatory changes which are on the horizon,” he says.
In March, Wolters Kluwer conducted a survey on regulatory reporting in Australia. Of more than 30 ADIs surveyed, about 75 percent said they were at that time taking a tactical, partially automated approach when it comes to regulatory reporting. With constant updates and reviews to regulatory reporting in Australia and worldwide, firms can no longer rely on manual processes spreadsheets to collect and organize growing volumes of data to report to regulators.
It’s time to wake up, smell all the different regulatory roses and start overhauling and enhancing their data systems.
This article was originally published by Waters Technology.