The carrot and the stick: How regulators can drive a data quality revolution

Regulators should combine two different approaches to tackle data quality issues in reporting

by | December 2, 2021 | Gresham Technologies

In a landscape filled with regulatory reporting complexity and scrutiny, regulators are ‘cracking down’: tolerance for poor quality data and errors is waning, and the time for turning a blind eye has finished.

However, this hasn’t resulted in the errors reduction and data quality improvements that the industry might have expected, raising the question: is fear enough to compel financial institutions to address their data and reporting issues? Or is an incentive required as well?

High-quality, accurate data has never been more important to firms – or more difficult to achieve. Stored across multiple repositories and jurisdictions, hampered by manual processes and a lack of oversight, financial institutions’ data is undeniably complex – and this will only get worse as we see an increasing trend of regulatory divergence across jurisdictions.

Methods for motivating firms around regulatory compliance can be divided into two camps: the carrot and the stick.

The most commonly used ‘stick’ is regulatory fines. According to ESMA’s Sanctions report, fines imposed by National Competent Authorities (NCAs) under MiFID II more than quadrupled in value in 2020, reaching an aggregated €8.4 million (comprising of 613 sanctions and measures), compared to just €1.8 million (371 sanctions and measures) the year prior.

Yet data integrity and reliability has not improved following these punitive measures. ESMA’s EMIR and SFTR 2020 data quality report, released in April 2021, highlighted data quality as a specific issue for the first time since the European Market Infrastructure Regulation (EMIR) came into effect over seven years ago.

Around 7% of daily submissions under EMIR requirements are currently being reported late by counterparties. Additionally, up to 11 million of open derivatives did not receive daily valuation updates, and there were between 3.2 and 3.7 million open non-reported derivatives on any given reference date during 2020. Approximately 47% of open derivatives (totalling circa 20 million) remain unpaired.

The use of legacy solutions already prone to data quality problems has compounded things further. This is particularly seen in firms’ approach to SFTR, a regulation that many have viewed as a close enough cousin to EMIR to simply hit copy and paste.

This demonstrates that, while the stick does have a role to play, it alone is not enough to address the issue of low data quality in reporting.

Instead of penalising firms for poor data quality and inaccurate regulatory reporting financially, helping them to realise the benefits of strong data integrity – such as reduced costs, more efficient operations, and an easier path to innovation – may prove more effective in encouraging the C-suite and reporting teams to prioritise data quality.

However, that’s not to say that the carrot and the stick must be mutually exclusive. Leveraging both in tandem is likely to be the most effective route to improving standards.

Above all, regulators should convey that acting not out of fear, but out of ambition, is the key to data success.

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