Posted: 27 Jul. 2023 5 min. read

How banks can derive benefits from increasing regulatory reporting requirements

At a glance

  • The Bank of England’s (BoE’s) “Future of Finance” report estimated that compliance with regulatory reporting costs UK banks £2 billion–£4.5 billion per year1. The UK regulators have a longer-term ambition of streamlining regulatory reporting and making data collection and usage more efficient for themselves and the banks. In the EU, the European Banking Authority (EBA) has introduced a pathway for more proportionate supervisory reporting2 and the European Securities and Markets Authority (ESMA) has published a data strategy which includes an objective to reduce regulatory reporting compliance burden3.
  • However, various regulatory initiatives driven by pursuit of other objectives, such as improvement of financial resilience (Basel 3.1) and market transparency (EMIR 3.0), are leading to increased regulatory reporting pressure on banks. For Basel 3.1 implementation alone, the Prudential Regulation Authority (PRA) proposes to introduce 19 new and modify 12 existing COREP templates, while EMIR 3.0 adds over 80 new data field requirements.
  • In addition to the sheer volume of regulatory reporting required, both banks and regulators are still struggling with the quality of reporting. The PRA has run a programme of skilled person reviews of regulatory reporting, following a letter to CEOs in 2021 on thematic findings on the reliability of regulatory reporting. The review has identified deficiencies in systems and controls, and governance4. We have previously discussed these findings and their likely causes in a series of blogs5. The PRA expects banks to address thematic findings and will continue with the programme.
  • In this blog, we look into the future changes for regulatory reporting and discuss how banks can derive broader business benefits from the upcoming regulatory change programmes. Banks could leverage more granular and reconcilable data to: improve the visibility of trading activity; better manage counterparty risk exposure and capital consumption; improve coordination between functions to generate deeper understanding of business processes; and consider cleaning up and standardising data in preparation for future regulatory reporting changes.

Regulators focus on reducing the reporting burden, but still ask for more data

In January 2020, the BoE released its discussion paper on transforming data collection in the UK financial sector with an objective to “lay the foundations for joint work to reform data collection over the next decade6”, recognising that this will be a substantial challenge and may require more radical changes. This paper sought to identify ways to decrease the regulatory reporting burden on the industry and, concurrently, to achieve improvements in the use of data for supervision and peer analysis. The PRA has begun streamlining reporting in insurance, achieving by its own estimate a reduction of Solvency II reporting requirements of 15%7.  The Banking Data Review8 (BDR), which began in 2023, is expected to be a multi-year project. The PRA’s Chief Executive Sam Woods has referred to BDR as a “unique opportunity to modernise regulatory returns9”. As with insurance, the PRA expects to target redundant data collections and improve proportionality and is working together with the FCA to achieve this.

The FCA has reiterated its ambition, in 2023/24 Business Plan, to reduce firms’ regulatory reporting burden by implementing additional data collection improvements through its Transforming Data Collections programme10. In the EU, the EBA has cited increasing proportionality of the reporting framework as one of its key objectives for regulatory reporting. The EBA is looking at the design of the reporting requirements, user-friendly infrastructure and the use of technology to reduce costs. ESMA is also looking to reduce the regulatory reporting compliance burden by streamlining the use of data, reducing duplicative and inconsistent requirements, sharing data more effectively and exploring emerging technologies.

These programmes should be beneficial to the industry from an efficiency and cost reduction perspective in the medium term. However, In the shorter term, this transformation will put additional pressure on the banks’ regulatory reporting and change management resources which are already stretched by other regulatory changes.

The regulatory reporting changes can become less of a burden if banks use them to drive other benefits. In the past, some banks have seen an opportunity in increased regulatory reporting requirements and produced “data lakes” – cleaning up their data to drive a variety of uses. For example, some banks analyse the transaction reporting data they produce to detect and prevent market abuse to help them determine individual customers’ profitability. In our view, banks can further leverage upcoming regulatory and transaction reporting change programmes to drive other businesses benefits, maximising the return on regulatory spend.

EMIR 3.0 and Basel 3.1: transaction reporting and regulatory reporting changes

New EMIR rules, which go live in the EU and the UK in Q2-Q3 2024, include the addition of over 80 new reporting fields (c57% increase). The way of reporting will change to XLM submissions using ISO20022 which will standardise the language and formats across the entire reporting chain, improving data quality, consistency and comparability for both regulators and the reporting entities. This format will also help to align EMIR to MIFID and the Securities Financing Transactions Regulation (SFTR) reporting. The reported data will become more granular and reconcilable. New product codes will provide additional standardisation and allow aggregation of transactions by products, improving visibility of potential risk concentrations.

Changes required to comply with Basel 3.1 reporting requirements are also broad and far-reaching. In the EU the banking package was agreed at the end of June 2023 with expected go-live in January 2025. The new rules will heavily alter common reporting (COREP) and Pillar 3 disclosures. In the UK, the PRA has proposed to introduce 19 new and modify 12 existing COREP templates. New templates require reporting changes for Market Risk, Credit Valuation Adjustment, Operational risk, Output floor and Credit risk. So far, the PRA notes that it has only proposed “minimum changes to reporting that are necessary to implement Basel 3.111” implying that the more extensive reporting changes are likely to come out of the BDR. The EBA has also published a draft RTS on Basel 3.1 reporting12 requirements and the structure of the new COREP templates to replace the set of existing templates. These modifications are likely to touch on every aspect of capital reporting and require banks to report more extensive and granular information.

Areas that banks could explore to derive additional benefits from increasing regulatory reporting requirements

1. Analyse and reconcile data to improve visibility and reduce risks

EMIR 3.0 is undoubtedly a heavy technological lift for banks. However, the move towards standardised Critical Data Elements (CDEs) such as Unique Transaction Identifier (UTI) and Unique Product Identifier (UPI) will encourage banks to reconcile the definitions and eliminate duplications leading to better visibility of trading activity and exposure to various counterparties. While improved analytics of data generated for Basel 3.1 purposes (e.g output floor information) can lead to better understanding of the key drivers of capital consumption and optimisation of capital allocation.

Enhanced standardisation and data lineage should allow banks to join the dots more effectively between various systems. Although financial reporting (FINREP), COREP and transaction reporting have all gone their separate ways since they were first introduced reflecting significant regulatory change, we estimate that there is still substantial interconnection, with 20-30% of EMIR reporting fields flowing into capital reporting framework. Moreover, for operational risk reporting, the PRA explicitly considered aligning the reporting definitions between COREP and FINREP to give firms sufficient synergies in template preparation13. Making the link between the systems and exploring the overlaps will result in deeper understanding of data flows which could improve banks’ ability to identify missing data elements leading to better data/reporting accuracy, reducing misreporting risk and delivering a consistent message to the regulators. The information can also be leveraged to improve controls, reduce operational risk, and improve MI. 

2. Leverage new reporting requirements to encourage better coordination between functions and a deeper understanding of business processes 

Although formal responsibility for regulatory reporting usually rests with a bank’s SMF2 (Chief Finance Officer), senior managers should emphasise that in order to achieve the required granularity and quality of regulatory reporting, different functions, especially finance and risk, need to work together. Banks could encourage staff to develop their understanding of the business processes beyond the boundaries of their function, improve cross-function communication, and further enhance the use of the three lines of defence model. 

For example, the implementation of EMIR 3.0 will enable - and should encourage - front office staff to improve their understanding of the nature of the transaction (e.g. “event type”), transaction life cycle from booking to the transaction reporting, and knowledge of counterparties (e.g. “nature”, “corporate sector”, and “clearing threshold” of the counterparty). This should drive reduction in operational risk and improved counterparty risk management.

To comply with Basel 3.1 regulatory reporting, banks may face a challenge in sourcing data of the required quality and granularity. The process of generating this data is likely to require a lot more interaction and coordination between front office, risk and finance functions. For example, for market risk, the PRA proposed reporting of delta, vega and curvature sensitivities. The reporting of this data is likely to require closer cooperation between the front office and risk. The PRA also proposed new elements for credit risk reporting including data points regarding on-balance sheet netting which are likely to require closer cooperation between finance and risk. Improved communication between these functions will bring longer‑term benefits for risk management.

3. Consider cleaning up and standardising data in preparation for future regulatory reporting changes

In the longer term the regulators’ objective is to shift to digital regulatory reporting. In the UK, the BoE saw the “Future of Finance” report as an opportunity to “completely rethink” the way it collects, stores and analyses data14. The five-ten-year horizon set by the BoE in 2020 was "intended to encourage an ambitious vision, while recognising that a number of significant challenges and information gaps still need addressing before widespread changes are possible”15 Since then, the BoE and the FCA have been working with the industry to explore potential options, including pulling data directly from firms’ systems, a “post and subscribe” model using a web portal or other mechanism or using Application Program Interfaces (APIs) allowing communication over various platforms without manual intervention.

These options will be difficult to implement. For instance, pulling data directly from firms’ systems, considering the significant amount of interpretation pertinent to regulatory reporting, is unlikely to be possible without detailed knowledge of the individual data and systems which regulators do not have. Successful implementation would require significant further standardisation of definitions potentially leading to large-scale changes of future regulatory reporting.

Lately, the BoE has been focusing efforts on developing a consolidated glossary supporting data collections and creating a consolidated landing page for balance sheet and derivatives-related disclosures. In a recent speech16, Rebecca Jackson, Director at the PRA responsible for the RegTech agenda, acknowledged the importance of standardised data in particular for visibility on risk exposures and concentration of risk. The PRA also acknowledged that the current regulatory returns flamework is not fit for purpose in the current fast-paced market environment. We expect the PRA and the FCA to move to a more pro-active phase of transforming regulatory reporting, leveraging the lessons learned over the past two years of engagement with the industry.

The EBA is also analysing the costs and benefits of increasing standardisation, tools to help with the implementation of reporting and the feasibility of more integrated reporting. ESMA too has acknowledged the importance of data standardisation and found that there is a need for further harmonisation of reporting regimes which should reduce duplicative and inconsistent requirements.

To achieve cost savings and regulatory compliance, many banks are leaning towards fintech solutions for regulatory reporting. However, without appropriate data sources and CDEs, fintech solutions will not be effective. Banks will therefore need first to invest in cleaning up and standardising their data before they can deploy fintech solutions effectively.

Conclusion

Regulatory reporting is an onerous and labour-intensive process. Considering the vast amount of ongoing regulatory change and regulators’ longer-term ambition for lower cost and high quality digital regulatory reporting, it is safe to say the change in regulatory reporting requirements is far from over. To complicate matters further, some banks are still playing a catch-up when it comes to regulatory reporting. We have observed that many banks are still working with legacy systems with changes in regulatory reporting contributing to the existing patchwork. Furthermore, regulatory reporting data is still subject to significant interpretation and manual adjustment.

These considerations mean that banks will have to invest significantly in upgrading their regulatory reporting infrastructure and improving data quality. This is not only to prepare for the regulators' longer-term ambitions but also - and much more immediately - to meet their current expectations. In doing so banks need to identify opportunities to generate a return on their investment.  In our view, these are likely to result from: more automation driving, in the longer term, a reduction in operating costs; a deeper understanding of data flows which could improve banks’ ability to identify missing data elements, thereby improving data/reporting accuracy and reducing misreporting risk; improved visibility of trading activity and exposure to various counterparties which could lead to better management of counterparty risk; and a better understanding of the key drivers of capital consumption could lead to optimisation of capital allocation.

1 Future of Finance: Review on the outlook for the UK financial system (bankofengland.co.uk)

2 EBA Risk Reduction Package Roadmaps.docx.pdf (europa.eu)

3 ESMA launches Data Strategy for the next five years (europa.eu)

4 Banks active in the UK: 2023 priorities (bankofengland.co.uk)

5 We need to talk about regulatory reporting…, David Strachan, Rod Hardcastle, Alex Spooner, Luca Pagani (deloitte.com) and We still need to talk about regulatory reporting…, David Strachan, Tom Spellman, Sinead Rothwell, Rod Hardcastle (deloitte.com)

6 Transforming data collection from the UK financial sector - Discussion Paper (bankofengland.co.uk)

7 DP 4/22 - The Prudential Regulation Authority’s approach to policy (bankofengland.co.uk)

8 The BDR consists of several initiatives, including Commercial Real Estate data, Strategic Review of Prudential Data Collection, Retail Banking Business Model data, Incident, Outsourcing and Third-Party Reporting (Transforming data collection communication to firms – 28 November 2022 | Bank of England)

9 Prudential Regulation Authority Business Plan 2023/24 | Bank of England

10 Business Plan 2023/24 | FCA

11 Chapter 12 – Reporting | Bank of England

12 Technical standards on reporting and disclosures for investment firms | European Banking Authority (europa.eu)

13 Chapter 12 – Reporting | Bank of England

14 New economy, new finance, new Bank (bankofengland.co.uk)

15 Transforming data collection from the UK financial sector - Discussion Paper (bankofengland.co.uk)

16 Supervision and Data − to boldly regulate as no one has regulated before − speech by Rebecca Jackson | Bank of England

Authors

Margarita Streltses

Margarita Streltses

Senior Manager

Margarita is a Senior Manager in Deloitte’s EMEA Centre for Regulatory Strategy, specialising in capital markets regulation. Before joining Deloitte in February 2023, Margarita worked 3.5 years in Wholesale Banks supervision at the Financial Conduct Authority. Prior to that, Margarita spent 10 years at a global investment bank in Equity Research and Regulatory Relations roles. Margarita holds BSc in Management and MSc in Energy, Trade and Finance from Bayes (Cass) Business School.

Enrico Messori

Enrico Messori

Director

Enrico is a Director in Deloitte’s Risk Advisory Practice with over 17 years experience in the Financial Services industry. He specialises in providing regulatory risk advice to investment banks on market & counterparty credit risk and data management, focusing on regulatory reporting. Before joining Deloitte, he led the Market Risk Management and Reporting team for the IB division of a major Italian bank.

Key Contacts

David Strachan

David Strachan

Head of EMEA Centre for Regulatory Strategy

David is Head of Deloitte’s EMEA Centre for Regulatory Strategy. He focuses on the impact of regulatory changes - both individual and in aggregate - on the strategies and business/operating models of financial services firms. David joined Deloitte after 12 years at the UK’s Financial Services Authority. His last role was as Director of Financial Stability, working with UK and international counterparts to deal with the immediate impact of the Great Financial Crisis and the regulatory reform programme that followed it.

Neil Cowie

Neil Cowie

Director

Neil is a regulatory compliance expert, with over 25 years’ experience in financial services, he has worked at a number of top tier banks and management companies. Neil’s key area of interest is embedding compliance controls within capital markets business processes, especially involving the use of technology and data. Neil has designed and implemented diverse risk and control frameworks at several financial institutions, covering trade/transaction reporting, trade surveillance/market abuse, shareholding aggregation, conflicts management and control of information.