Digital Regulatory Reporting – inching closer to automated compliance

Earlier this year the Digital Regulatory Reporting group – led by the FCA and Bank of England – released its viability assessment for automating some regulatory rules for regulated firms. While the group’s latest report stops short of recommending a preferred solution, it lays down a marker for how DRR is likely to be taken forward.

Progress on digital regulatory reporting

Seeking efficiencies in sending data to the regulators

The DRR project which has been running since 2017 aims to use technology to make it easier for firms to comply with their increasingly burdensome and costly regulatory reporting requirements. According to last year’s Future of Finance report, regulatory reporting currently costs UK banks up to £4.5 billion every year.

As well as reducing costs and administrative burden, the project also seeks to improve the quality of information that firms provide in the reporting process.

Progress to date

The DRR group comprises the FCA, BoE and a cross-section of firms. In Phase 2 of the pilot, which took place in 2019 and built on the phase 1 activity from the previous year, the group zeroed in on:

  • the economic viability of DRR (from firm, industry and economy-wide perspectives); and
  • potential solutions for generating machine-executable regulation and defining data.

Table

A financial fillip for firms and regulators?

Reporting mortgage data could be digitised

In Phase 2 the DRR group drew on industry data relating to mortgages and derivatives. According to the viability assessment, the cost-benefit scenario of DRR for mortgages in particular suggests that creating a more seamless reporting process would deliver benefits for firms and regulators that outweigh its costs.

Potential win-win for firms and regulators

Reducing the cost of interpreting and implementing reporting instructions would be a major benefit for firms. Notably the latest report acknowledges that under DRR it would be the regulators’ responsibility to write a digital, machine-executable version of the rules – something that has been an open question until now.

Regulators also stand to benefit. Costs savings – reduced time spent dealing with queries and checking data – and improved timeliness and data quality (which may, in turn, aid regulatory decision-making), are cited, if not quantified, in the report. 

The extent of any benefit would, of course, be tempered by the costs of moving to DRR. The report touches on several of these – from firm set-up costs to establishing a new central body – and acknowledges that “work on analysing the business case […] is incomplete.

A sustainable solution – the search goes on

Any solution must be scalable and open

Further work is needed to find an optimal solution for DRR. According to the report, that solution should be scalable across domains, span as many reporting processes as possible, and be inclusive for all users – in other words, a solution built on open standards.

Repurposing existing solutions

The DRR group has looked reusing existing solutions in the market, in particular:

  • the Financial products Mark-up language (“FpML”) XML standard, which is in widespread use across derivatives reporting; and
  • the Common Domain Model (“CDM”) data standard, which is in its relative infancy and is similarly used for swaps and derivatives reporting.  

While these options were closer to meeting the DRR criteria than those in the mortgage domain (many of which were insufficiently “open” or lacked the required level of detail), the report found that “no existing third-party solution appeared to meet all the requirements”.

Developing new solutions

Separately, the DRR group has continued to explore developing a custom solution. Two proof-of-concepts, built on open standards and adopting a model-driven approach, have been completed. 

The first approach, which looked at using open-source semantic technologies in the context of mortgage reporting, was hamstrung by a lack of tools to develop the model and a need for further investment.

The second, a collaboration with the ISDA CSM project for derivatives (extending its tools to satisfy DRR needs), yielded some positive results – but similarly requires further investment to be taken forward. 

Incremental innovation – what next for DRR?

The report finds that while the benefits of DRR may be greater if it is implemented across different reporting areas, “the best way to pursue the DRR vision is in small, incremental steps” that deliver value to all parties at every juncture. 

Looking ahead, there is no specific timeframe for next steps but the DRR group has identified the key decisions to be made and, in particular, what technology is best placed to bring DRR to life. These conclusions, which are summarised [in the box below], suggest there is still some way to go before DRR becomes a reality.

 Phase 2 - key conclusions
DRR may deliver incidental benefits, such as increased transparency of regulations
Open, technology-agnostic standards may increase competition and reduce costs (although also have cost implications) 
The market is evolving, and solutions may exist in future that meet the needs of DRR
Further investigation of optimal solutions is needed in the next phase 
The business case for DRR is strongest when used for multiple domains and aligned to firms’ existing change initiatives
Re-using industry data and technical standards could significantly reduce costs

Find out more about what DRR is and why it matters for firms.