Is Transaction Reporting breaking the bank?
Banks have spent on average £17 million each building in-house transaction reporting solutions for Dodd-Frank and EMIR. Having spent all this money, banks are finding the accuracy of their reporting is not up to scratch. Many failed to appreciate the complexity of the requirements and the tight regulatory timelines did not help matters. In a recent report by Sapient, they estimates that Tier 2 banks will each spend a further £30 million to expand their trade reporting solutions. This is a conservative estimate in my view, as banks will need to both address the other G20 rules and resolve Dodd-Frank and EMIR issues of data integrity, implement greater operational controls and produce meaningful MI.
Whilst continuing to grapple with the complexity of existing regulations, new regulations (MiFID II/MiFIR) will increase the chances of steep fines for non-compliance, guarantee further system build-out costs, and could see the total cost of transaction reporting spiralling out of control.
In light of this, how should banks proceed with transaction reporting? In my opinion, with banks’ in-house solutions becoming too costly in their current form, the priority should be to reduce costs without compromising compliance, which could be achieved by outsourcing to a third party provider.
What makes expanding in-house transaction reporting solutions difficult?
High implementation costs, client confidentiality breaches, and hefty fines continue to plague banks’ in-house reporting solutions. These three reasons equate to regulatory, legal and reputational ramifications which I believe mean building on today’s transaction reporting solutions is reaching the point of being unfeasible, unless there is a change in approach.
High cost to implement
Building the technology for in-house solutions had a high upfront implementation cost. Maintenance costs remain high as the regulations change and I do not see these decreasing in the near future. Implementations have not gone as planned, creating additional technology costs and expensive manual workarounds. Due to the lack of flexibility and extensibility of current solutions, it looks as if banks will need to spend as much again to deliver new functionality for MiFID II/MiFIR.
Client confidentiality breaches
Providing a free delegated reporting service for clients remains a risky proposition. Offered with a view to retain business, banks have struggled to report accurately for clients. With new regulations, the investment required to maintain confidence in what is reported on their clients behalf may surpass the revenue it retains. I think banks will look to exit this proposition at the first opportunity.
Despite the large budgets that transaction reporting programmes command, banks continue to face the threat of steep fines for non-compliance. To date the FCA has fined banks close to £20million for failures in transaction reporting. With no end in sight for additional regulatory requirements, this figure is only set to increase.
What makes outsourcing transaction reporting attractive?
Banks need not be tied down to clunky, in-house solutions that are affected by manual processes and technology that is not scalable. By utilising an outsourced service, banks could benefit from a reduced cost, improved flexibility and a lower compliance risk. Whilst this option may not be suitable for every bank, it is definitely worth considering given the potential financial, operational and reputational benefits available.
Cost is likely to be a key consideration for transaction reporting moving forward. Sapient estimates that maintaining in-house reporting solutions will cost banks £12 million per year. By contrast, outsourcing is predicted to more than halve banks total costs, to £5.5 million per year. If this prediction can be validated in practice, then it is hard to argue for maintaining in-house solutions at twice the cost.
Flexibility and scalability
Outsourcing offers a more adaptable and cost-effective alternative to in-house reporting. It’s certainly easier for banks to handle a fixed yearly managed service fee for a complete transaction reporting service, rather than planning for the cost of maintaining in-house solutions as they do today.
Lower compliance risk
Outsourcing offers best-in-class transaction reporting solutions that are regularly updated to reflect the latest reporting rules. Whilst the onus to comply would remain with the original bank, outsourcing could increase the accuracy of reporting and thus reduce the risk of fines for misreporting.
What route should banks take now?
For larger banks the immediate challenges with outsourcing are responsibility for their client compliance, data sharing implications and security concerns, which means there may be no viable option but to expand their in-house solutions in the near term. Smaller banks with low reporting volumes and no delegated proposition may find it quicker and easier to take the outsourcing route now.
In the long term, I believe that all banks would benefit from a move to a third party supplier, which should provide the flexibility and scalability to reduce cost and achieve compliance in an evolving regulatory reporting environment. The key to success for banks that continue expanding in-house solutions in the long term is finding a way of improving reporting accuracy whilst keeping costs down, which so far has eluded them.