I recently had the opportunity to participate in the webinar Data: The Tail That Wags the Stress Test (click here for replay) with David O’Connell of the Aite Group. As I reflect back upon the event, a few brief observations come to mind.
In its ongoing coverage of the global stress testing mandate, Aite Group sees a regime that just might have the foresight, flexibility, and teeth required to prevent financial institutions from becoming too big to fail. Aite Group has also identified significant benefits, such as improved risk management and lower capital requirements, for banks that fully embrace stress testing by using its capabilities to go beyond the compliance mandate and achieve analytical insights for banks’ risk managers. In fact, a recent Aite Group survey of 18 stress-testing banks finds that only a third of these institutions limited the objectives of these projects to regulatory compliance.
My role is transatlantic, so I have the benefit of observing regulatory and data management practices on both sides of the pond. In helping our financial services clients ensure that their data supports their regulatory compliance obligations, I observe firms’ different approaches. In recent months I have seen a new and growing approach in the US to data assurance for compliance. I recently presented on this approach to a mostly UK banking audience at FIMA (the financial information management conference) in London. I’ll share it with you here, as my ‘compliance-view from America.
In the world of financial regulation, data standards are being developed and implemented to better enable regulatory compliance and to improve business performance. Government-mandated as well as informal industry and government standards, including those for stress testing (DFAST, CCAR), LEI, and Financial Industry Business Ontology (FIBO), are in various forms of delivery and development. These standards are expected to facilitate better communication and understanding of risk within financial firms, as well as by regulators. Ultimately, these standards, once fully adopted, will be a great tool for managing global financial risk.
I spend a good amount of time with clients and industry colleagues alike discussing the news and events of the day affecting regulatory information assurance and management. Increasingly, in those discussions over coffee (and occasionally something stronger), it is becoming evident that improved Risk Data Aggregation (RDA) is becoming top of mind at many large financial institutions. In fact, many of our clients are telling us with increasing frequency that their latest efforts are centered on improving information aggregation processes to support ever-expanding and ever-changing stress testing scenarios. For example, we are working with multiple clients now to implement improved CCAR data assurance processes.
I had the pleasure of attending the Financial Information Management Association (FIMA) event in Boston this week. As always, the conference was equal parts educational and inspirational. It’s exciting to learn from so many smart people dedicated to realizing the value of information.
In summing up the event, I found there were several concepts that dominated attendees’ discussions, and regulatory data management was at the top of the list. Throughout three days of panels and presentations, it remains clear that regulatory requirements are driving a significant number of budgets and projects in financial services sectors. It seems scarcely little money or resources are left for business improvement projects.
The ever-changing nature of financial regulations is putting increased pressure on IT resources, making it critical that business stakeholders have control over their data and reporting processes.
A perfect example of this is the Comprehensive Capital Analysis and Review (CCAR), which mandates that large U.S. banks undergo a series of stress tests to prove they have sufficient capital in the event of a severe economic downturn. CCAR is a data-intensive regulation with banks required to submit numerous reports, each featuring hundreds of data elements that must be accurate, complete and properly formatted.
With the recent release of both the final IRS regulations for FATCA as well as recent guidance notes from the UK tax authority (HMRC) on data collection and provision, it seems as if the FATCA train is finally starting to pick up momentum and financial firms can all make progress with clarity. But how do these recent publications impact foreign financial institutions (FFIs) from a client data management perspective?
To assist FFIs in achieving compliance, the initial reporting deadline has moved to 31 March 2015 with the deadline for client on-boarding compliance remaining January 2014. In addition, accounts held by individuals with balances below $50,000 are now exempt from review and the categories of “deemed compliant” FFIs and retirement funds that are considered exempt have been expanded. That said, the key criteria of the client data search, U.S. indicia check and classification remain the same. Therefore having complete, accurate and suitable data on which to base FATCA processes is still a must.
In recent weeks, many people have asked if they can breathe easier and delay their FATCA programs now that the initial compliance deadline has been pushed back to January 1, 2014. My answer is consistently the same — NO. I was at a FATCA conference in London last week and the overriding sentiment from the financial firms attending was that the delay is helpful, but there is still no time to waste. Let me tell you why.
The bottom line is that identifying, reporting, and classifying all clients that need to be assessed under FATCA guidelines is a complex and time-consuming task. Financial institutions will be unable to determine the size of the challenge they face until they dig deep into their client data.
Financial institutions working to comply with the Foreign Account Tax Compliance Act (FATCA) must ensure they have a single view of client information across business lines and, in some cases, geographies — or risk damaging important client relationships.
Accurately identifying, reporting, and classifying all clients subject to FATCA guidelines are not easy tasks. This situation is complicated by the web of geographically distributed systems and databases that are relied upon to collect and store a firm’s client information, as well as the complex client relationships that often exist for high-net-worth individuals and commercial entities.