ComplianceMay 01, 2020

APAC’s regulatory reporting pressures: No finish line in sight

(As published in the Global Risk Regulator, a service from the Banker, January 2020)

At the start of this new decade it’s fair to say that many banks across the APAC region are facing regulatory change fatigue. Regulators have, after all, been demanding greater transparency, financial institutions have been forced to make significant investments to keep up with the additional pressure, and solution providers have had their hands full to help ensure continued compliance. Initially, global regimes such as the Basel III Liquidity Coverage Ratio (LCR), net stable funding ratio (NSFR), International Financial Reporting Standard (IFRS) 9, OTC derivatives reporting and the Common Reporting Standards (CRS) were rolled out, which has subsequently been supplemented with complete local regulatory reporting overhauls, with Australia (EFS) and Singapore (revised MAS610) taking the lead.

While many institutions bemoan this “change fatigue”, the reality is that there are many more major changes on the way, with no finish line in sight. The “Basel 3 finalization” (also referred to as “Basel 4”) deadlines are just around the corner, with significant changes to regulatory risk requirements – such as credit risk, operational risk, market risk and liquidity risk – including their corresponding disclosures. Further, most regulators have the ambition to replace the current outdated concept of form-based reporting with granular data submissions; for instance, Hong Kong’s HKMA has Granular Data Reporting (GdR), India’s RBI has Central Information Management, Thailand’s BOT has Credit Dataset, while Singapore’s MAS and Australia’s APRA have both indicated that more granular reporting requirements are already being worked on.

Financial institutions are evolving

As transformation sweeps the sector, to comply – more than ever before – financial institutions need to integrate data from many different systems, produce much more granular information for regulators at higher frequencies, submit machine-readable files, all while providing full traceability from submissions back to the underlying source data.

Traditionally, many institutions took a largely manual approach to regulatory reporting – typically via internal spreadsheets and Macros, which gave comfort by sticking to established procedures and spreadsheets, enabling business users to easily visualize and organize data. But this flexibility is prone to human errors and comes with numerous control risks, a price which many are no longer willing to pay with the extent of the changes recently introduced by regulators; freely changing or adjusting data, formulae and formatting heightens the risk of errors, inaccuracies or inconsistencies, and makes establishing a clear audit trail difficult. This approach is also inherently limited in terms of extensibility and scale; as the scope of the spreadsheet is extended beyond its original purpose in response to new regulatory demands, the increase in data and complexity will quickly become impractical to manage manually. In essence, very few institutions in APAC can still get away with regulatory compliance without an adequate level of automation and control.

Another market dynamic is the rise of digital banks (also referred to as virtual banks) across the region, who have the opportunity to be more nimble with less overhead; digital banks don’t have physical branches, nor do they have legacy systems which are not optimized for future regulatory requirements. For instance, Hong Kong recently approved 8 new licenses for digital banks, Singapore is planning to approve 5 by mid-2020 and Malaysia recently announced a similar plan. There is no doubt that this will reshape the financial industry across the region.

2020: from burden to opportunity

We are now at a stage where the cost of compliance typically adds up to 4% of financial institutions’ total revenue1. While one could look at regulatory reporting a significant burden in the short-term, there is also an opportunity to achieve a competitive advantage for those institutions that can adopt RegTech – modern technologies which automate and improve the process of regulatory compliance – in a manner which achieves a long-term trifecta of reduced cost, improved agility and enhanced decision-making based on greater internal transparency.

For regulatory reporting in APAC, these are the top three RegTech trends anticipated for 2020:

  1. Managed services: applying a managed services / cloud-based model for regulatory reporting was widely considered as taboo until just a couple years ago, while today there are few institutions left who still see themselves adopting a traditional on- premise-based approach in the coming 3-5 years, with most regulators have explicitly shown support, and even encouraged this direction (e.g. Singapore’s IMDA’s co-funding scheme). In 2020, we anticipate an exponential rate of adoption of cloud-based models.
  2. Analytics: as institutions successfully address their regulatory reporting obligations via automation, more emphasis will be put on analytics: the ability the slice and dice all relevant data and calculations used and produced for reporting, make projections for the future under specific assumptions and ultimately get better business insight.
  3. Artificial Intelligence: in 2020, AI will finally start receiving the attention it deserves in the context of regulatory reporting. Research shows that nearly three quarters of the broader RegTech providers will be adopting AI moving forward – especially in the context of describing patterns and predicting behavior (Anti-Fraud and Anti Money Laundering have some well know use cases)2 – however, for holistic regulatory reporting, where financial institutions convert their raw data from diverse system into consolidated structured submissions, the use of AI is still virtually unheard of today. If humans can design end-to-end regulatory reporting processes, with today’s technology, machines can learn to do the same – better and faster.

1 Duff & Phelps, “Global Regulatory Outlook,” Duff & Phelps, New York, 2018

2 G. M. B. Z. A. G. P. K. H. H. K. J. G. E. H. A. H. S. W. N. Y. Emmanuel Schizas, “The Global RegTech Industry Benchmark Report,” Cambridge Centre for Alternative Finance, Cambridge, 2019.

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