Regulatory Reporting The pain is well understood. Now there is a cure.

Alexander Bommes Capco Partner

The increasing burden of regulatory reporting presents banks with multiple challenges – from allocating sufficient personnel to keep track of developments in legislation, down to the operational tasks of collating, validating and submitting the ‘numbers’. It all absorbs valuable resources; at the very time banks need to be most focused on profitable growth. There has been much discussion of the impact of compliance. Now, as Alexander Bommes – a Partner at Capco explains – there is a viable and sustainable response to the demands of regulatory reporting. Alexander, tell us a little about your own background. How did you develop your perspective on these issues?

mean costs incurred for banks? Or can there be benefits as well?

Alexander: On the ‘inside’. I spent several years of my professional career involved in audit functions, both for major banks and in the consulting industry. I have seen the almost epic evolution of regulatory demands. Today, we have the most complex and detail- driven regulatory environment ever. This is largely as a response to financial crisis and the drive for deeper understanding and control of systemic and institutional risk. And it is set to become more demanding, not less.

Alexander: There can be major benefits. Compliance and being in good competitive shape are not mutually exclusive. In fact, the opposite is the case. The whole thrust of reporting now is towards a detailed and current profile of the bank’s status, in terms of risk profile and risk resilience. But that level of understanding is valuable for the bank as well as the regulator. There are things you need to know, and that you should know, about the basic status and capability of your business. This is irrespective of whether a regulator wants to know as well!

Is the reporting task and its associated functions still seen as a purely tactical issue by banks?

Do we need yet another consultant pointing out the perils of the regulatory environment?

Alexander: Not any more. I think we have seen the following progression. First, regulatory reporting was ‘restricted’ in its impact. For example, with Basel II, a lot of the response was focussed in the Credit area. Then there came a shift towards a more ‘holistic’ approach. Banks are quickly realizing that you can’t satisfy regulatory demands for ‘total reporting’ by taking a fragmented approach inside the institution.

Alexander: No! We need action now.

Must the reporting process and the whole ‘compliance machine’ only

The issues are well understood in principle. It’s in the area of practical, operational support that banks need solutions. We know the pain. Now we need a cure. In a few words, what is your response to the pressures of regulatory reporting? Alexander: Two words: The Factory. Of course, this is a complex area, so it will take more than five seconds to explain! But the basic proposition is called the “Regulatory Reporting Factory”. Or, “The Factory”, for short. It aims to very substantially reduce the cost, disruption and distraction of regulatory reporting, while the quality and consistency of the reporting process are increased. Low touch/high quality reporting, based on robust and future- proof common processes, is the end game.

Common data formats and shared platforms. Robust, consistent process. Reduced cost of compliance. Strategic insight from operational data. Improved risk understanding. Greater bandwidth freed up for revenue generating functions. Future proofing. Headache reduction.

Compliance and being in good competitive shape are not mutually exclusive. In fact, the opposite is the case. Why develop an offer such as this? And why now?

Is the Factory only available in Germany?

Alexander: Because the situation is urgent. Banks are facing a “perfect storm” with the demands of regulatory reporting. The expression is a cliché but it is also appropriate. Regulation is proliferating. The depth of detail required by the reporting process is profound and increasing. And the timescales for reporting are contracting. In fact, quarterly reporting will look like a luxury as we move to monthly! In Germany for example, the banking industry is facing three major challenges all at once: implementation of Basel III, revised MaRisk and IFRS 9. This is no small demand on them.

Alexander: The applicability is global. Our initial Partner base was developed in Germany and we also have client engagements there. But through our wider Partner network, the expertise and approach are applicable throughout Europe and indeed globally.

So how does the Factory reduce these demands? Alexander: With an outsourced solution. Basically, to reduce demands we are offering an outsourced solution to help banks make sure they understand the legislation and its impacts as they evolve and are able to achieve compliance. With our partners, we provide the applications, processsing and industry expertise to onboard bank data at one end of a seamless process. Then we deliver fully compliant regulatory reporting at the other end. We engage with the complexities and deal with them. The client can focus on their core business. How does it work? Alexander: For now, the short answer! The Factory itself consists of a data center element powered by one of our partners Deutsche Borse, application and process management from Capco and application support from another partner, BSM. Combined, these capabilities enable us to work with banks from their ‘as is’ state today and transform their reporting capability.

If a bank came to you today looking for the Factory’s support, what would be the next steps? Alexander: Rigorous situation assessment. We are working with banks in their live reporting environment, so we already have direct experience. The Factory is already functioning. However, a key point to make is that, although our offer is a ‘factory’, we do not take a ‘mass production’ approach. Every situation is unique. So while our end objective is high quality, low touch reporting, precisely how we get there will differ from one institution to another. We start with a rigorous assessment of the ‘as is’ state. What does the Factory need in order to make a positive difference? Alexander: The right raw materials. Just like any other factory, ours needs a certain and consistent quality of raw

Although our offer is a ‘factory’, we do not take a ‘mass production’ approach. Every situation is unique. materials. In this case, the raw material is data. Very often, the data is spread across the organization. Some of it may well be derived from legacy and

even manual processes. This is the reality. So a major task is to perform analysis and delineate what is needed to achieve a viable standard of data flow into the Factory. Ideally, we want to get to 80 or 90 percent automation of data processes feeding into the Factory. How long will it take for the benefits of the Factory approach to be seen? Alexander: Clients will see benefits quickly. From the moment we engage, there will be benefits in terms of greater visibility and understanding of internal data gathering and reporting processes. As I have said, every client situation is different. But it is realistic to say that it takes around a month to prepare a business case that determines whether or not the Factory approach will be appropriate. If the indications are positive, we need around three months to define the precise services that will lead to low touch/high quality reporting. Then within the following nine months to a year, the transition to the Factory’s managed services will take place. What does ‘transformed’ reporting capability look like? Alexander: Visibility, consistency and process improvement. The extent of the transformation will depend of course on the organization’s starting point. But, at high level, it’s true to say that the Factory will provide ongoing and reliable visibility into key ‘strategic’ reporting areas, from balance sheet statistics through equity and liquidity ratios to foreign trade and consolidation requirements. In operational terms, we bring the practical data consistency and process improvements that enable timely and compliant reporting. And that is the bottom line. What are the specific profiles of bank that will benefit most from the Factory? Alexander: Tier Two and Tier Three institutions. Tier One banks will, given their size and international operations, be more likely to have the in-house resources and expertise to deal with reporting challenges, without external support. It is the Tier Two and Tier Three institutions that are facing the steepest increase in demands on their

bandwidth. We surveyed the market as part of our planning process for the Factory. The feedback from Tier Two and Three banks was overwhelmingly positive. We had many, many responses confirming that a solution to regulatory reporting was highly relevant and an urgent matter. More, they felt it was imperative.

to consider our outsourced solution approach. But this would have been very, very different ten or fifteen years ago. Nobody would have let ‘outsiders’ into their Accounting or Regulatory Reporting Departments. Move forward to five years ago and banks started a major shift. Regulatory demands proliferated. They had to sit down and

our teams know the industry. So, although each situation will be unique, the main issues will be familiar. This reduces the learning curve considerably.

Can you paint a picture of the most common issues the Factory can help with?

look at the advantages of outsourcing, even in areas that were previously considered ‘off limits’. Today, we have clients not only for Regulatory Reporting, but for their entire Accounting function. This is a major culture change. It also confirms a high level of trust in the confidentiality and accuracy that we can offer.

you can offer clients of the Factory?

Alexander: Small teams, big demands on limited resources. This describes the situation we typically encounter. The bank will have a small internal team facing the big and rapidly growing demands of regulation. Very often, they will be dealing with complex and disparate legacy data. This adds greatly to the challenge, because the legacy data will be in multiple different formats and on many separate platforms. So you have two big issues here: pressure on resources; and data that is not readily fit for purpose for regulatory reporting. The Factory can help! The Factory needs ‘deep dive’ data from the bank’s core processes. Do you think institutions will be reluctant to involve ‘outsiders’ at this intimate level? Alexander: No. The culture has changed. Clients’ very positive responses confirm that they are happy

Is the experience of working with the Factory disruptive for the bank? Alexander: Not so far. Of course, when you come into a situation from

Ultimately, the validity of the reporting data will remain the responsibility of the bank. What are some of the key ‘trust factors’ that

Alexander: We have three ‘trust factors’. These are key areas that make the Factory offer fit for purpose in this very sensitive environment. First, take our relationship with the Regulators. For example, in Germany we fully satisfy all the regulatory requirements for an outsourced service of this nature. We stay close to the fast-evolving regulatory environment and we remain proactive. Second, with our Factory partners, we are constantly reviewing every aspect of our hardware

The real Capco value-add is our deep understanding of financial services outside there is always a learning curve. But we exist to support and help improve. It is also a big advantage that

and software support: “fit for purpose today, ready for change tomorrow” is our mantra. Third, the real Capco

value-add is our deep understanding of financial services. The Factory is an outsourced solution, yes. But the bank is working with a team that understands the industry just as much as they know the technology. How can a single ‘factory approach’ satisfy multiple regulatory autho-

Finally, can you summarize in a few words the key benefits of ‘the Factory approach’ Alexander: It’s all about real world benefits. Common data formats and shared platforms. Robust, consistent process. Reduced cost of compliance. Strategic insight from operational data. Improved risk understanding. Greater bandwidth freed up for revenue generating functions. Future proofing. Headache reduction. No more groundhog day!

Alexander is a Frankfurt based Partner in charge of Capco's Compliance offering (an integral part of Capco's overall Finance, Risk and Compliance domain). Over the past decade, he has been responsible for a range of implementation projects related to regulatory law, including IFRS, Basel II, MARisk, working for large multinational clients in Germany and other European countries. Alexander has deep subject matter expertise in SAP and topics related to IT-architecture.

About Capco

rities and jurisdictions? Alexander: We don’t take a ‘one size factory approach’. In each of the client’s different geographies, we take a ‘hubbed’ approach. We provide a set of managed services that is specific to the particular regulator and legal entity. In reality, are improvements in regulatory reporting response always going to be marginal? Alexander: No. Now they can be profound. The thinking used to be that regulatory response had to be ‘groundhog day’. Every time there was a new regulation, every institution had to react from zero. Right now, we are showing that this is not the case. Through the Factory, we are building a ‘regulation radar’ that clearly shows how regulations are evolving, when and how they will impact, and what will need to be done to achieve compliance. We are moving from reactivity to planned implementation.

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