Regulatory reporting

Bank capital ratios and RWAs remain front and centre for investors and boards, as they underpin a variety of key performance indictors as well as being a key measure of safety and soundness.

Increased regulatory scrutiny

Regulatory supervision of the risks banks face and the capital needed to absorb shocks relies on a suite of regulatory reporting. In its annual report published in June 2022, the Prudential Regulation Authority (PRA) re-iterated that “complete, timely, and reliable regulatory returns continue to provide the foundation of effective supervision.”

Recent PRA thematic reviews of regulatory reporting continue to indicate that while progress has been made in improving the overall control environment over regulatory reporting, many banks still need to make significant enhancements in their processes, particularly around upstream data lineage, end-to-end process and controls documentation, and investment in more strategic solutions to enhance data quality and reduce the level of manual intervention in the reporting process. Alongside the continued s166 thematic reviews of regulatory reporting, we have seen a number of large fines in relation to regulatory reporting and governance failures and failures to promptly notify the PRA of errors in reporting.

Given the importance of capital and risk weighted assets (RWAs) as a core indicator of the stability and soundness of banks, stakeholders are also becoming more interested in the robustness of controls, processes and governance surrounding the calculation of regulatory metrics. Capital ratio calculations rely on a wide range of underlying data sources, and typically involve a number of judgements, interpretations and assumptions. This is important across the whole of the banking sector, where investor confidence is critical, so demonstrating that these key metrics and information flows are reliable is vital.

Accuracy, rigour, oversight

The PRA requires banks to apply the same standards of accuracy, oversight and rigour to regulatory reporting that are applied to financial reporting. This is a challenging target in many cases, where investment in systems, processes, data and resourcing for regulatory reporting may not have been at the same level as for financial reporting for a number of years. Boards and senior management should be cognisant of the level of investment that is required to upgrade systems and processes for delivering regulatory reporting to the standard expected, and these challenges remain high on the board agenda, as banks continue to implement a range of enhancements in data lineage, end to end controls and governance.

A place in the Audit and Assurance Policy

As banks continue to enhance their regulatory reporting frameworks, the inclusion of regulatory reporting or capital metrics within an Audit and Assurance Policy (AAP) can help boards and stakeholders increase confidence in the quality of reporting, by providing a better understanding of where assurance has been obtained, and how the risk of error and potential future regulatory intervention is being managed. Assurance activities may be obtained internally across the three lines of defence as well as from independent external assurance providers., with independent, standards-based assurance giving the highest degree of confidence.

As the requirements for assurance over capital and regulatory reporting vary by jurisdiction, inclusion in the AAP can help provide clarity over which components of regulatory capital ratios have been audited, assured or reviewed as part of other internal processes, giving investors and stakeholders a clear picture of the confidence levels attached to the different elements of bank capital disclosures. In relation to regulatory reporting specifically, this can include how data, IT infrastructure, controls and governance are being considered, and how any issues may be remediated to achieve a higher degree of confidence over time. As a number of banks work through independently commissioned or regulatory-driven reviews, understand areas for improvement, remediate deficiencies and then seek to ensure the remediation has been effective, inclusion in the AAP can help illustrate to stakeholders the journey to improved reporting processes, as well as the potential role of independent rotational assurance to give the highest level of stakeholder confidence.

Regulators remain prepared to use a variety of supervisory and enforcement tools to ensure banks achieve a high quality of regulatory reporting. The AAP will also provide investors and other stakeholders a mechanism to influence areas for assurance and provide increased confidence and trust in the safety and soundness of financial institutions as we enter increasingly challenging economic times, against a background of continued regulatory change.