Three Key Steps on the Road to Compliance
Financial institutions across Europe face a raft of regulatory reporting requirements, including Basel II and International Financial Reporting Standards (IFRS). Both relate to the measurement of risk and the disclosure of a bank’s financial information, respectively.
Basel II is a framework for financial institutions to measure and report on, in particular, credit and operational risk. In doing so, it addresses all the other risks a bank faces, including reputation, liquidity and legal risk, and aims to promote greater stability in the financial system. IFRS compliance requires banks to prepare consolidated financial statements using uniform accounting policies for like-for-like transactions. It promotes greater global financial consistency when an organisation discloses its accounts.
Although the industry has responded by putting in place measures to address compliance, it is always a challenge for financial institutions and relevant departments to get their heads around the many different requirements of different regulatory frameworks.
The first place to start is for banks to spend time understanding differences in structural models, internal reporting processes and systems, and local cultures. At the same time, they must have a clear grasp on existing and future changes in external regulation in every country where they have a presence. Companies that do not have a strong grip on regulatory requirements for their operations face strict penalties and risk damaging their corporate reputation if they are held to account by the regulators. We believe that organisations must take three key steps to stay firmly on track with compliance.
The biggest challenge that financial institutions face is establishing a framework that enables them to identify and map their processes against policies for obtaining adequate and complete data for reporting.
Many organisations feel swamped by the barrage of rules and the speed with which they change and are rightly concerned about their ability to comply. Organisations can make regulatory compliance a simpler task by creating a framework to monitor internal processes and map progress.
The framework for compliance should detail governance structures, policies, programmes, partners, and processes. An internal compliance framework will prepare the organisation and its employees for any new requirements imposed by government. It will also build and ensure transparency for operational procedures for accurate financial reporting.
Within this framework, it is imperative that working scenarios and requirements are determined as early on in the planning process as possible. And, as technology, regulation and processes all change, there is the flexibility to develop and meet these requirements.
A project team should also be formed to lead and manage compliance projects. The project team must outline how people, processes, and systems will be brought together and developed. It also provides an opportunity to look at where best practice can be established and how this can create more innovative reporting procedures, enabling the organisation to become more competitive and efficient as a result.
Compliance is a joint responsibility for an organisation and its technology partner. Organisations need to identify the different compliance requirements involved and work with a trusted partner to understand how they meet Basel II and IFRS requirements. When working with partners, organisations must be confident that the necessary expertise is available to provide advice on corporate governance legislation.
Financial institutions must work closely with their partners to understand and map their business processes and how the reporting applications will underpin its operations for compliance. Organisations must select a partner that will enable them to embed the processes into the IT application and leverage the framework and related data to manage operational requirements to drive decisions. This will start to increase the level of transparency that a financial institution maintains around its reporting operations and procedures.
For financial institutions with operations spread across multiple regions, there will be different reporting requirements, standards and processes already in place. As well as providing local country reporting, different operational entities will have to ensure there are also the systems and processes in place to support integrated reporting for multiple countries. There will be different levels of awareness on standards and compliance requirements between different countries.
To overcome this, financial institutions must build open relationships between other region and country departments to create transparency and operational efficiencies. Transparency across regions and departments in terms of reporting requirements ensures that processes and procedures are made more accurate. It enables not only the improvement in day-to-day operations, but also fosters responsibility and confidence in compliance reporting.
This complete transparency throughout an organisation ensures that employees are able to view work in progress, while detailing sensitive information that is increasingly crucial to staying compliant and minimising any risk of inaccurate reporting. If transparency is not established, it can be counterproductive to the success of an operational risk framework.
Different structural models for compliance make it difficult for financial institutions to ensure that employees have a grasp on how compliance affects them. Financial institutions need to address the challenge of communicating the relevance of reporting procedures to employees who may not have direct responsibility, but whose department will have a direct impact on compliance.
In a financial institution, most employees will be forced to modify certain internal procedures in order to comply with IFRS. But for other companies where employees are not directly involved with financial reporting, the measures can appear less relevant to their own operations. Organisations therefore need to be put in place measures to inform and update staff on the requirements.
A dedicated point of contact for staff is a good way to champion the importance of compliance and to articulate the consequences of non-compliance. Training programmes can also be put in place to educate and bring employees up to speed on the new reporting requirements and the tools available. This achieves their buy-in as it enables employees to see how their activities are monitored and how they can take ownership of compliance responsibilities.
Better education will in turn lead to slicker internal efficiencies by giving employees the ability and confidence to adhere correctly to new reporting procedures. With a system that provides a central pool of knowledge, and an internal culture of awareness, details and status on reports will be properly monitored and recorded. Everyone working on a country report will have access to the same information, and this will improve the speed and flow of vital reporting information. As a safety net, this will also enable senior staff to spot potential errors and failures in compliance.
While compliance is here to stay and the changing complexity of reporting appears to be a constant headache for financial institutions, implementing advanced governance procedures can provide the impetus for organisations to gain competitive advantage. Successful compliance strategies will consult staff and support operations across multiple regions. They will also anticipate future legislative requirements and ensure that organisations stay on course for compliance. Organisations that do this methodically and build transparency across its country operations will lead the way. They will build competitive advantage and safeguard their corporate reputation by negotiating the rocky compliance road ahead with confidence and best practice.