Regulatory reporting enables prudential regulators like the UK’s Prudential Regulation Authority (PRA) to spot threats to the safety and soundness of banks and building societies and help ensure financial stability. Investment in this vital reporting has fallen behind investment in financial reporting, which is in part what led the PRA to express their disappointment that “significant deficiencies” had been found in the regulatory reporting process, to remind firms that they need to apply the same care and diligence to regulatory reporting as they do to financial reporting.
Key areas for focus and action are:
- Oversight and ownership – some firms delegated responsibility too far down the organisation and allowed processes to become complex and fragmented. Independent assurance, by internal audit or an external provider, can help ensure reliability and accuracy.
- Controls – the control environment around models was emphasised as needing improvement, as well as a reliance on spreadsheets without sufficient controls and unsatisfactory reconciliation.
- Investment - firms should focus on strategic rather than tactical fixes to reduce the need for significant manual intervention. Regulatory reporting should be given the capacity and capability it needs, having fallen behind financial reporting.
- Data – more focus is needed on robust sourcing of data, with clear governance where incomplete data is used.
Questions around the robustness of regulatory reporting are not new, and many banks have worked hard to address these challenges. Philippa Kelly, ICAEW’s Director, Financial Services said: “We’ve maintained the importance of confidence in the controls, processes and governance surrounding the production of regulatory ratios and related information for banks and their stakeholders consistently since the financial crisis.”
In 2017 the Financial Services Faculty published Banking regulatory ratios: ICAEW assurance framework which can be used in a modular fashion by internal audit or external assurance providers to design work that helps ensure the reliability of regulatory reporting.
The PRA’s specific focus on spreadsheets and models illustrates a clear instance where banks and building societies can work to make improvements. ICAEW’s David Lyford-Tilley said: “Over the last eight years, ICAEW’s Excel Community has created a range of spreadsheet thought leadership resources for organisations of all sizes; beginning with Twenty Principles for Good Spreadsheet Practice. This was a landmark take on the most important rules for safe and effective spreadsheet use for people of any skill level. We’ve continued with two follow-up papers and a fourth is due shortly – particularly of relevance is the Financial Modelling Code, which any good model should aim to conform to.”
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