Regulatory reporting programs: Human capital imperative has been saved
Regulatory reporting programs: Human capital imperative
Notwithstanding the importance of a sustainable governance structure and high-quality data, perhaps the most critical element of an effective regulatory reporting program is proper investment in human capital.
May 11, 2018 | Financial services
Unfortunately, in many cases, firms have underinvested, both in number and types of resourcing, in the human capital component of their reporting programs. This could be a result of senior management viewing the regulatory reporting organization as a “back office” function, where skills needed are limited to basic financial accounting knowledge with an operations orientation. Traditionally, staff in a regulatory reporting function that was part of corporate finance were long tenured and knew legacy processes well. Conversely, staff in the business lines, who were responsible for providing data to corporate finance, had little knowledge of reporting requirements or the impact of this data. This approach worked as long as the data concepts were not complex, data requirements were static, and the processes supporting the report preparation process were not subject to frequent change.
In today’s regulatory reporting and data environment, the “traditional” approach may become a root cause for failing to meet regulatory expectations. Firms with an effective regulatory reporting operating model have begun to develop strategies for human capital that consider subject matter expertise, analytical capabilities, and relationship management skills. These skills should be resident in at least the key staff involved in the regulatory reporting process, including data stewards located in business lines.
When designing a human capital strategy for regulatory reporting, firms should consider the following:
- Firm-wide knowledge of regulatory reporting requirements and data management practices
- The appropriate mix of conceptual understanding of data collections and detailed subject matter expertise
- Career paths and succession plans for regulatory reporting programs
- Sources of hiring pools and staff retention plans
Of course, firm-wide training programs are foundational. Effective training can help achieve an appropriate level of knowledge to meet reporting requirements. Our recent blog on regulatory reporting governance outlines the details for an effective training program.
Firm-wide knowledge of regulatory reporting requirements
In a firm that has an optimized regulatory reporting program, the staff responsible for regulatory reporting data—in corporate finance and the business lines—integrates their technical knowledge of reporting requirements and data definitions with an understanding of the firm’s products and services. These firms also effectively integrate their change management programs to continuously update the firm’s knowledge.
Optimized programs typically have data owners in the business lines, who designate data stewards that are accountable for data availability and quality. Data stewardship programs should be firm-wide and align with policies and procedures of the enterprise data program. Critical to an effective data stewardship program is having data stewards in the business lines knowledgeable in regulatory reporting requirements for data they are provided, including the data definitions and impact of the data on the firm, and adherence to regulatory requirements and compliance programs. For example, the impact of the notional value of a derivative contract can have on regulatory capital ratios.
Data stewards in the business line are uniquely placed to combine their knowledge of products and practices to uncover data quality issues. Furthermore, they are well-positioned to conduct analysis and provide contextual information that explains unusual data conditions to data aggregators and ultimately regulators.
Data management skills are also a core competency for data stewards. Specifically, data management competencies are needed in the business line for:
- Critical data element identification
- Data requirement definition
- Data quality assessments
- Data cleansing
At an industry level, these skills are evolving and standard measurable competencies are emerging, for which standard firm-wide training can be developed and implemented through existing data offices or third-party vendors.
Data concepts and subject matter expertise
In today’s regulatory and data environment, subject matter expertise and understanding of conceptual design of regulatory data definitions is a crucial need for the corporate finance regulatory reporting team. In this context, subject matter expertise requires a detailed understanding of report-specific data definitions at the attribute level (i.e., each cell) and applicability of these definitions across products (e.g., loans, derivatives).
Overlaying this knowledge is the understanding of how the data is used and the impact that data attributes have on the firm. Knowing how the data is used is a key factor in interpreting data definitions and understanding regulators’ requests. Understanding data usage is also an important input when assessing materiality and conducting risk assessments of the regulatory reporting process.
Similar to business line data stewards, regulatory reporting staff in corporate finance should also have appropriate data management skills. These skills may include:
- Metadata management
- Data requirement definitions
- Data cleansing
- Business/report requirements development
Additionally, regulatory reporting staff should be technology savvy, with a working knowledge of tools and applications leveraged by the function, as well as being able to work closely with technology providers.
An often overlooked skill for regulatory reporting staff is relationship management. The corporate finance role in the report production cycle puts regulatory reporting staff squarely between regulators and data providers in the business lines. It is critical that relationships with regulators are built on trust and transparency. Regulatory reporting staff use their relationship management skills when working with regulators on data requests, understanding data definitions, responding to questions concerning data anomalies, and resolving reporting issues. Just as important is how well corporate finance communicates with staff in business lines. Clear communication is needed to explain data requirements, the impact of the data provided by the business line, and the criteria for providing high-quality data.
Also, these same regulatory reporting staff are interacting with regulatory agencies (outside of supervisory teams) and the reporting teams of the various agencies. This requires protocols and adherence to banking institutions’ standards for interaction with regulators but also retention requirements that support those meetings, information requests, and questions and answers, including interpretative guidance.
Need for strategic approach to human capital
Finding experienced candidates with the necessary expertise needed to sustain a highly effective regulatory program can be challenging. As regulations and the associated data have become more complex with increased coverage, sourcing regulatory reporting staff solely through entry-level hires or operations staff is probably no longer viable. The increasing need for experienced regulatory reporting staff has resulted in highly competitive markets for skilled regulatory reporting staff. Therefore, a strategy of buying skills may not be a realistic option. Leading institutions are developing new strategies to right size their regulatory reporting teams with the knowledge and skills needed to meet the demands of the current regulatory environment.
Career path succession plans
Building firm-wide data and regulatory reporting organizations starts with establishing a culture where expertise in regulatory requirements and data operations is a valued commodity. Staff in business lines and corporate finance with these skills and responsibilities should not be viewed as entirely a “back office” function. Building the knowledge and skills needed to have a highly effective regulatory reporting program for participants in the regulatory report process is an important investment. Because of the high investment needed to onboard the necessary knowledge and skills, staff retention is a key objective of the human capital strategy.
To help meet these objectives, creating a career path for regulatory reporting staff is important. In doing so, required knowledge and skills for advancement must be clearly articulated with measures established, and a compensation structure implemented to recognize the value and risk these positions undertake. In many respects, career paths should align with the firm-wide data programs. Talent can be shared or exchanged between the data organization and corporate finance, leading to adoption of leading practices across the firm.
As with any good human capital strategy, succession planning is an important component. Early identification of high potential staff should be conducted, with pipeline and advancement planning occurring at least annually.
Sources of hiring pools
The second component of a human capital strategy is identifying from where qualified, high-potential staff can be sourced. Sourcing staff with finance backgrounds (e.g., business analysts, and accountants) fits for regulatory reporting staff. The knowledge of finance provides an understanding of data at the conceptual and technical level. An emerging source of talent comes from candidates with data management backgrounds. The capabilities associated with data management expertise can be quickly applied to report preparation. When pursuing data management expertise, identifying candidates that have a business and financial acumen is key.
Geography of a firm matters (i.e., when a firm is in a large financial center, and the number of options for sourcing of resources is large). For firms outside financial centers, careful consideration should be given to the sources of candidates. Options might include local universities that have data management programs or non-financial industries that deal with large data sets (e.g., health care services). These considerations are particularly important when considering near sourcing the regulatory reporting function.
Transformation of regulatory reporting programs relies, first and foremost, on the staff responsible for the data, at the business line and corporate finance.
Without careful thought and planning, staffing models will not be sustainable and any transformation will likely not be lasting. The impacts that may result are data quality challenges and difficulty meeting regulatory expectations.
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