Top 5 regulatory challenges facing financial institutions

10/07/2018 – By Anish Shah, Product Director, AxiomSL EMEA

New regulatory reporting requirements and the limited time to prepare for them present substantial compliance challenges to financial institutions (FIs). As we move into the second half of 2018, AxiomSL identifies five critical regulatory challenges that widely impact FIs.

Increased scrutiny means FIs must accurately meet the complex requirements set by regulators or face substantial penalties due to poor practices. It is imperative that firms invest their resources wisely, to achieve timely and efficient compliance.

Our take on the top five regulatory challenges going forward:

  1. Lowering cost of compliance
  2. Navigating SFTR
  3. Preparing for ICAAP/ILAAP
  4. Managing AnaCredit and SHS deadlines
  5. Adjusting to the Brexit effect

1. Lowering cost of compliance

As we approach budgeting season, which takes place for many FIs during September and October, now is the time to consider the cost of compliance. Many firms struggle to keep pace with the growing sets of regulatory requirements. This requires investing strategically into the right solution to ensure the entire reporting cycle functions properly.

We advise FIs to avoid using a patchwork of different tactical solutions as such an approach may significantly increase both the cost of compliance and the complexity of reporting, especially for multi-jurisdictional reporting obligations. Adopting a holistic, data-driven and transparent regulatory solution is necessary to control costs and manage the complexity of regulatory compliance in the long term.

2. Navigating SFTR

The European Union (EU) introduced Securities Financing Transaction Regulation (SFTR) after the Financial Stability Board (FSB) and European Systematic Risk Board (ESRB) proposed policies to reduce risks by improving the transparency of securities financing transactions (SFTs).

Although we expect SFTR to begin in H2 2019, both financial counterparties (FCs) and non-financial counterparties (NFCs) should plan now to tackle the challenges posed by the regulation.

SFTR requires market participants to report all SFTs to an approved trade repository (TR) on a T+1 basis. The SFTs in scope include securities lending and borrowing transactions, repurchase agreements (repos), reverse-repos, sell-buy back and buy-sell back transactions. It is crucial that firms understand the product scope of the regime to accurately satisfy the reporting requirements.

SFTR presents substantial challenges for market participants, such as unique transaction identifier (UTI) generation, collateral reuse, eligibility, completeness and accuracy of data and the reporting format. It is also a good opportunity for firms to automate and strategically streamline their reporting infrastructure. Preparing for compliance will offer a wide-range of benefits from data management and transparency to operational and cost efficiencies, provided the right systems and processes are in place.

3. Preparing for ICAAP/ILAAP

Article 73 and 86 of CRDIV require institutions to have an internal capital adequacy assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP) respectively. During recent reviews, first published in 2016, the ECB pinpointed substantial differences in the approaches taken at the individual bank level. This triggered the necessity for enhancements at all banks.

The European Central Bank (ECB) will start using the resulting guiding principles in 2019 to evaluate ICAAPs and ILAAPs. Institutions need to address the gaps in their ICAAPs and ILAAPs now to ensure timely and accurate compliance.

Due to the complexity of the inputs required, the Pillar 2 Guidance forces considerable collaboration across the firm, such as between the regulatory, corporate treasury, performance management and enterprise risk management teams, creating significant challenges for FIs. Additionally, time-intensive and error-prone manual processes and outdated systems can extend lead times and cause data inconsistencies. Firms need to have an integrated ICAAP and ILAAP architecture in place to efficiently combat these wide-ranging challenges.

4. Managing AnaCredit and SHS deadlines

With less than three months to go until the submission deadline for complete datasets, AnaCredit and Securities Holdings Statistics (SHS) reporting requirements continue to pose substantial challenges to the banking industry. For these regulations, data quality and data management have become key areas of focus. Sourcing data from multiple and disparate sources and certifying its completeness remains the main challenges.

Further, meeting the granular level of data required by regulators can be an enormous task. Whereas other types of reporting typically focus on total loan values, AnaCredit and SHS reporting demand details on a loan-by-loan or security-by-security basis.

Firms also face stringent obligations around the frequency of reporting, as regulators will require updates that are monthly, quarterly or ‘on change’. This latter group consists of reports that must be submitted only if a change occurs on the underlying loan/trade data after the completion of initial reporting. All in all, these factors raise implementation difficulties for firms already inundated with compliance burdens.

5. Adjusting to the Brexit effect

Since June 2016, Brexit has caused uncertainty across the UK financial services industry, particularly around regulatory compliance. Some global FIs, with their EU headquarters in the UK, are moving some of their businesses into the EU27 and resetting their entire framework. Moving operations, physical infrastructure and human resources can be extremely challenging. In addition, the banks will have to shift their focus from local UK regulations to new jurisdictional scopes, thus creating yet another burden.

We recognise these as the top five regulatory challenges moving forward and they each play a role in success of FIs’ regulatory compliance efforts. Firms need to take a strategic approach that not only simplifies regulatory compliance but also generates operational efficiencies in a broader perspective.

AxiomSL’s dedicated Regulatory Analysts understand and interpret current regulatory requirements of different jurisdictions, whilst also ensuring that clients stay up to date with any future regulatory developments. Our proactive approach allows clients to achieve timely and accurate compliance for financial and statistical reporting, capital and credit risk reporting, liquidity reporting, operational reporting and adherence to International Financial Reporting Standards, including IFRS 9 and IFRS 17.

AxiomSL’s end-to-end solutions are fully supported and maintained by in-house expert teams at a local, regional and global level, greatly reducing overall cost and complexity of compliance, increasing operational efficiency and ensuring a quick time to market.

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