The Problems with Regulatory Reporting – and How Technology can Fix Them

Regulatory reporting is supposed to be the tool that helps governments ensure that the financial sector performs smoothly and does not cause any cascading problems. Even though there are extensive regulatory reporting requirements they often fail to achieve this objective, as evidenced by the recent financial crisis the world went through. What can we do to improve reporting and ensure that we don’t face similar problems in the future?

The importance of regulatory reporting

Regulatory reporting is important because it provides stability to the financial sector, which in turn gives stability to the whole economy. Governments are aware that the nature of the financial sector makes it the bloodline of the economy and it must be managed. The purpose of reporting is to ensure that the government receives all such information which can help it prevent a crisis. This purpose often remains unfulfilled.

The financial crisis of 2008 is a great test case. It didn’t start in 2008 – 2008 is when the world became aware that we had a problem, the real problem started a long time ago. The effects of the crisis could have been minimized if the government was ready for them. Regulatory requirements have increased significantly due to the crisis however it is important to note that we had a lot of legislation and regulations about these requirements before the crisis too. Why, then, did the problems stay hidden?

Fixing the problems in our current regulatory framework

The (numerous) regulations specify that anything that may cause disruptions in the economy or may cause a crisis needs to be reported, and all such things are indeed reported. The problem is information asymmetry – the government did not have the data that the financial institutions did. While the financial institutions themselves failed to detect the problems, they may have been detected by the government if they were reported to them, but they never were, because businesses themselves didn’t know about them. Since regulatory reporting is done manually the bank decides what it reports.

Under such a system any problem that a business does not detect itself will also never be detected by regulatory bodies. The 2008 crisis was caused by increasingly riskier mortgages that started defaulting. If anyone had seen the underlying data and looked at the mortgages that the derivative market depended on, they would have realized the scope of the problem. There were many smart people who did see what was happening and tried to alert others to it as well but since the reporting everywhere showed things were running on track no one listened to them. The story of these smart people and a simple explanation of the crisis can be seen in The Big Short – which tells the true story of the people who foresaw the crisis.

The language of regulatory reporting needs to change

The problem is that too much in regulatory reporting is left to be decided by the business that is creating the report. We need to automate reporting as much as possible. This idea of automating reporting is growing in popularity because it solves almost all the problems that are plaguing reporting right now. It ensures that every business in speaking the same language and is providing the same information. It is not possible for one business to report a problem and another to not consider it a problem worth reporting if the reporting is automated. Automating reporting will also allow governments to compare the various reports available with each other as well as the previous reports it has, which will quickly allow it to detect any outliers or issues which the businesses themselves may not have been able to detect.

Automated reporting will require GRC solutions but that is not a problem because GRC solutions are already present in most organizations in the financial sector. If you are concerned about your organization’s regulatory reporting capabilities considering the increasing pace of regulatory developments, see what GRC automation can do for your organization. Get in touch with the 360factors team by signing up for a free trial or requesting a demo and we will demonstrate how the Predict360 suite can increase reporting accuracy and efficiency.

About the company

360factors, Inc. (Austin, TX) helps companies improve business performance by reducing risk and ensuring compliance. Predict360, its flagship software product, vertically integrates regulations and requirements, policies and procedures management, risks and controls, audit management and inspections, and on-line training and qualifications, in a single cloud-based platform based on artificial intelligence.

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