Regulatory & Compliance
Towards the end of 2010, the Basel Committee on Banking Supervision agreed on detailed measures to strengthen regulation, supervision and risk management of the banking sector. This package of measures, known as Basel III supplements the existing International Convergence of Capital Measurement Document (Basel II) which came into effect across the European Union, and many other jurisdictions, in 2008. Basel III has a wide set of reforms to improve the banking sector’s ability to absorb shocks in the market such as that experienced in 2007 (the “credit crisis”) including:
- Strengthening the global capital framework; by strengthening tier 1 and 2 capital requirements (tier 3 eliminated), enhancing risk coverage (including capital requirements for counterparty credit risk), introducing a leverage ratio and promoting countercyclical buffers
- Introducing a global liquidity standard to include a Liquidity Coverage Ratio (LCR) which ensures the banks hold sufficient high quality liquid assets that can be converted into cash to meet its cash outflows for a 30 day period in a high stress scenario and a Net Stable Funding Ratio (NSFR) which is intended to promote more medium and long-term funding of banks’ activities.
Why is it an issue?
- Translating the reforms into practice: Basel III introduces a number of additional sets of measures/ratios/calculations required to be published which translate to data collection and analysis requirements, new systems requirements, organisational changes and strategy re-direction
- Meeting the deadlines: the new Basel III standards will be phased in starting in 2013 and potentially running through until full adoption in 2019. This will require considerable co-ordination and alignment of a bank’s own strategic objectives with the regulatory drivers
- Managing the transition: the new regulations demand increased levels of capital and greater charges applied in trade pricing e.g. credit value adjustments and this must be accomplished while a bank continues to perform strongly and (where applicable) continues to lend responsibly in order to grow the economies in which it operates.
- We can assist banks in setting up strategies and a roadmap of activities for adopting Basel III regulations alongside their own growth objectives
- We can perform current infrastructure assessments for pain points, including data reconciliation breaks, data quality issues, and missing production control points
- We can assist banks with aligning their Basel II and counterparty credit risk business teams, infrastructures, data and reporting (originally split owing to timescales of regulatory demands versus business strategy) in order to consolidate operations and align to the Basel III regulations
- Looking longer-term, we can fully spec out systems/processes/people designs to achieve a strategic data collection, storage and interrogation architecture.
Following the impact of the economic conditions in the market, especially the wholesale funding segment and subsequent failure of financial services’ organisations to meet their regulatory obligations, the FSA set out the liquidity risk reporting discussion paper.
As a result of the discussion paper and in-line with the new Basel III regime, all UK FSA regulated banking entities and UK based FSA regulated branches and subsidiaries of overseas entities were required to be self-sufficient for liquidity purposes. All such firms therefore need to maintain adequate liquidity buffers to sustain operations in a liquidity stress scenario, and be able to report on their overall liquidity position on a regular basis. The FSA uses this information for market wide and/or firm specific liquidity monitoring and stress testing.
Why is it an issue?
- This is a new mandatory regulator requirement which had an October 2010 compliance deadline for all UK based institutions and branches
- To meet this deadline many organisations had to develop tactical solutions and are now in the process of considering more strategic implementations, incorporating the Basel III requirements
- In 2011 the FSA is expected to start independent reviews, for example S166s, over the processes and regulatory reporting.
- Assurance: we can provide a process/readiness review including data flows, systems, IT controls, and an assessment of the accuracy of FSA submissions
- Implementation: we can assist organisations with their implementation projects, data sourcing, cleansing, and project delivery as they move from tactical to more strategic solutions (most firms should have completed the first implementation phase for 2010 deadline).
All firms trading in securities have to meet a mandatory regulatory requirement to inform the FSA of all transactions by Close of Business the next working day. The FSA uses this data to detect and investigate suspected market abuse such as insider trading and market manipulation.
Why is it an issue?
- Significant effort is required to source, process, and submit the data through an Approved Reporting Mechanism (ARM) – an e-gateway to the FSA. Organisations have historically failed to do this effectively and accurately in the past with problems identifying reportable transactions, submitting accurate data, and fulfilling data retention obligations.
- Increased regulator interest in the last year and FSA fines for failures in transaction reporting have increased focus in this area: Societe Generale (£1.6m), Commerzbank, Credit Suisse (£1.8m), Getco Europe (£1.4m), Instinet Europe (£1.1m), Barclays (£2.5m) and City Index (£0.5m).
Assurance: using a combination of our process, controls, and data expertise we are able to assess the accuracy of FSA submissions based on extracting transaction data and undertaking a full re-performance of transaction reports to give either explicit confirmation that the controls are operating effectively or explicit evidence that controls are not working with a set of exceptions that can be followed up.
Solvency II is a new solvency regime for all EU insurers, reinsurers and bancassurers to be implemented by the end of 2012 (similar to Basel for the banking sector). It deals with the adequacy of capital allocation and risk management to protect policyholders. For insurers, it represents an opportunity to overhaul their internal risk models, reporting systems and capital requirements. A key element of the regime is the governance and management of information.
Why is it an issue?
- Solvency II has highlighted the important role that data governance, management and quality plays in the operation of internal models
- Historically insurance companies have had large legacy systems environments with multiple data stores of varying standards and formats with limited controls in place making data quality difficult to achieve.
What organisations should be doing in 2011?
- During 2011 organisations will be focused on delivering plans to implement process changes, actuarial model requirements, systems and data requirements necessary for their Solvency II programmes
- This will include undertaking data governance and data quality assessments to understand or validate the scale of remediation work required
- More broadly clients will be implementing data governance, centralised data collection and storage and control over extraction, transformation and loading of data.
Deloitte are able to provide the required breadth of service expertise. Specialists from our Insurance, Actuarial, Risk, Consulting, Audit, Tax and Corporate Finance teams can ensure that all aspects of Solvency II requirements and opportunities are considered and can support you through the entire process. Using our specialist insurance and data practitioners, we are able to assist clients in delivering the core data governance, management and quality aspects of Solvency II. Specifically:
- Data governance framework definition, implementation and assessment as well as supporting data management practices
- Data quality current state assessments and gap analysis against Solvency II requirements and remediation programmes.
During the financial crisis it became evident, when attempting to resolve banks in financial distress, that the information required to enable a timely resolution was either not available, difficult to access or unreliable. Living Wills or Recovery and Resolution Plans (RRP) are part of the regulatory response.
RRPs are contingency plans designed to reduce the risk of financial failure and systemic risk by preparation in advance. The UK regulators have begun the roll out of RRPs with five pilot banks. It is expected that all Globally Systemically Important Financial Institutions (G-SIFI) will be mandated to have an RRP by 2013 and work will commence in 2011.
There are two aspects to a Living Will:
- A recovery plan: containing the actions and options a bank may take to prevent it becoming distressed or to recover from financial distress
- A resolution plan: the resolution plan enables the authorities to resolve a financially distressed firm in a quick and orderly manner.
Why is it an issue?
- Governments are unable/unwilling to bail out the industry again - another banking failure is unthinkable hence G20 pressure for action
- The FSA expects to extend RRPs to all UK deposit takers not just G-SIFIs
- Banks face difficult challenges in assembling and maintaining the data required, testing their plans and highly complex separation issues surrounding legal entity, people, locations and technology.
- Assess and implement: we have experience of working with a number of the RRP pilot banks giving us a unique insight into the FSA and Bank of England requirements and the practical challenges in developing an RRP. As part of the work we’ve combined our cross firm skills in crisis response, processes mapping, data quality, IT architecture, restructuring, dependency mapping, contingency planning and war gaming to build and test (next step) RRPs. A key driver for RRPs is to protect deposits so our deep understanding gained in Single Customer View (SCV) projects gives us insight into the complexities involved in building and maintaining an up-to-date fit for purpose RRP.
Making sure you are adhering to the FSA’s Compliance Handbook is the first step towards an effective SCV plan. In addition to enabling wider regulatory compliance, such as with Living Wills and FATCA compliance, taking a SCV allows organisations to draw insights from their data to deliver commercial benefits.
Learn more about Single Customer View here.