Compliance Tech: CRD IV and the investment management sector

21 February 2014

At the turn of the year, the new capital requirements directive (CRD) IV legislation came into place, but Andy Gent, director of CRD IV product, Europe, at Arkk Solutions, worries how ready firms are to deliver their first reports under this regulatory regime beginning in May this year? This blog gives a summary of how European banks and investment managers are managing the adoption of both the legislation and the technology involved.

To understand the CRDIV compliance landscape across Europe, Arkk Solutions recently commissioned a survey that garnered the opinions of senior finance professionals from over 300 firms. Geographically, the report covers banks and investment managers from the UK, Ireland, Denmark, Norway, Germany, France, Spain, Belgium and the Netherlands, and it threw up some interesting findings I’d like to explore.

Despite the amount of coverage the new CRD IV capital adequacy legislation has had there was a surprising amount of respondents who were unsure if they had to report under COREP and FINREP stipulations. In total about a quarter of organisations were still unclear of their specific responsibilities. This was heavily influenced by respondents from Spain (80%) and France (71%) who were yet to understand if they were in scope.

The Regulatory Compliance Challenges
In our opinion the main challenge with the new legislation is the double impact of new reporting demands and their level of granularity, coupled with a new format to report in.  While firms have previously given their relevant national or regional regulator similar data in the past, it has previously been at a much higher level and, for the most part, it has been aggregated numbers, rather than the constituent parts. Under the new COREP format the number of data points reported can in some cases leap from 2,000 under previous regimes to 20,000. Aside from the volume of data to assimilating this volume of granular data could turn out to be a time consuming task, as companies need to interrogate multiple systems. The key here will be good project management. Within clients who we are currently working with those who are furthest ahead in their preparations, we have noticed teams assembled which encompass individuals from accounting, regulatory, risk and IT teams.

The second facet of this reporting is the conversion to XBRL. The European Banking Authority (EBA) has determined that the supervisory authority in each European country must deliver their data in this format.  To assist in this many financial institutions (FIs), asset managers and investment firms have passed this responsibility down the chain. The challenge of XBRL, apart from it being a new concept for many people, is that it is not human readable. This passes the responsibility back to the software vendor providing the tools to convert to XBRL to also operate the 6000+ data validations conceived by the EBA to ensure that CRD IV data is valid before filing.  

Dynamic Reporting
The way I see it, the dynamic new reporting process and formats, plus the adoption of new technology to support it, raised some interesting findings in Ark Solutions’ survey. 20% of respondents were still not confident that they fully understood the reporting requirements for COREP and FINREP, which raises he potential for inaccurate or incomplete data in their first filings. Small banks and investment firms made up this uncertain minority.

The confidence levels dip still further when it comes to knowledge of how to correctly file in XBRL, with only 47% feeling confident and 46% uncertain as to how to achieve this. This result reveals that it is the technical aspects of filing that will present the biggest challenges for the industry. This is no great surprise, as banking professionals  take regulatory changes in their stride. However, many will not have come into contact with XBRL and may not have been responsible for sourcing IT capabilities to help support them in their role.

Denmark, Ireland and the UK indicate substantial uncertainties in this area. Investment firms display the greatest degree of uncertainty (72%) whereas major banks and building societies are most confident (80%).

Selecting a Solution
In the three-step process IU advocated to understanding COREP and FINREP reporting requirements, I’d recommend the following:

  1. Understand if you’re in scope
  2. Data collation projects are vital
  3. Conversion services to XBRL standards and filing can help – survey respondents had some firm ideas about the key criteria in selecting the software for the final step of the process.

The key criteria that survey respondents had some firm ideas about when selecting the software for the final step of the process were as follows:

  • Cost effectiveness: given the investment in the overall project, including legislative consulting advice, assembly of project teams and potential disruption, the surveyed clients felt that having to invest heavily in additional technology was hard to swallow.
  • Simplicity: With the amount of additional work and new processes to establish the majority (predominantly the investment firms) sought a solution that would be easy to adopt from a user perspective.
  • Quick Implementation: the deadlines are imminent, so swift implementation of a reporting tool was a major factor for investment firms and banks alike.

In summary, from this report we can conclude that Europe is far from unprepared for the changes but there’s still a way to go and the timings will be very tight in some cases.  

Generally businesses are very confident that they understand the regulations, but perhaps less so the technical details of filing. Given they understand the status and complexity of their businesses and where that data sits internally it makes sense that some trepidation would surround the new piece of the equation – namely, XBRL filing.

Major banks are likely to be further ahead in the preparation process than other FIs or finance professionals, which is reassuring as their obligations tend to be the most far reaching - it is likely they will need longer to get ready.

Perhaps the most important takeaway is the contrast between perception and action. Europe says it is confident, with regulators and some firms commenting they ‘feel’ ready. But there are still many steps that still need to be taken before businesses are truly ready to file and I’d advise quick action. 

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