The average banking structure can require hundreds, if not thousands, of annual filings – and it’s getting more intense as global regulatory pressures mount on the financial services sector.
Since the 2008 global financial crisis, governments around the world have made it a priority to push a transparency agenda with banks, and banking boards are facing more scrutiny than ever before thanks to movements in global regulation across all sectors impacting common entity practices in the banking industry. Some countries have even run investigations into the sector – such as Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – which have, in turn, compounded the entity challenges for the banking industry, both in that country as well as for global players wanting to show a uniform approach.
There are three main factors that shape banks: compliance with a framework of laws and taxes; internal governance oversight; and external regulatory pressures. Each of these factors bring with it a set of common entity challenges for the banking industry. Below we explore just a few of the most common entity management, compliance and governance challenges facing banks, though each challenge does manifest differently, depending on the jurisdiction, regulatory needs and sector in which the bank finds itself. When in doubt about requirements, always seek expert guidance.
Ambiguity around ownership
The ultimate structure of banking entities must be clear if it’s to meet the requirements of the global movement toward transparency. Entity managers and boards alike must be able to demonstrate the ultimate beneficial owners of their own structure, with a clear and present organizational chart ready to hand over to auditors or regulators if asked.
Likewise, banks are expected to know the same information about their own clients. Regulations such as Know Your Customer (KYC), as well as the increasing level of Anti-Money Laundering (AML) laws, require banks to understand exactly whose money and investments they’re holding. The requirement to share information with institutions in other jurisdictions – thanks to regulation like FATCA and the Common Reporting Standard (CRS) – mean entity challenges for the banking industry don’t just center around their own structures, but those of their clients, too.
Quality of – and accountability for – legal entity data
That requirement for robust legal entity data for both themselves and their clients means that banks cannot rely on outdated methods of data capture and storage. Entity challenges for the banking industry include the need to collect a lot of data, from legal entity descriptions, ownership and business activities to meeting the needs of regulatory authorities. This data is then integrated by regulators with financial data so they can understand and monitor the condition and risks of bank holding companies and foreign banking organizations.
If this slew of data is corrupted or inaccurate in some way, it can have wider repercussions, including reputational damage for the bank and its clients. The bank must have a responsible person, such as a Chief Data Officer or Chief Governance Officer, to take accountability for legal entity data and ensure not only its accuracy and quality, but also that it gets to where it needs to go efficiently and securely.
Security and risk management
Banking institutions are expected to have effective data governance and data management capabilities for legal entity reporting, as well as a wider risk management strategy that stands up to scrutiny. The financial sector is a huge target for cybersecurity attacks, too, and bank customers, both institutional and personal, expect the very highest of security measures to be taken when it comes to their data and their investments. In fact, financial services firms are hacked 300 times more often than any other types of businesses.
Cybersecurity is the biggest risk concern for financial sector managers, yet only 49% of banks employ a full-time Chief Information Security Officer (CISO). Given that security and risk management is one of the major entity challenges for the banking industry, this position must improve.
Liquidity under Basel III
Under the Basel III international regulatory framework for banks – an internationally agreed-upon set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-2009 – banks must hold more capital against their assets, thereby decreasing the size of their balance sheets and their ability to leverage themselves. The framework aims to strengthen the regulation, supervision and risk management of banks, but it proves one of the common entity challenges for the banking industry given its tight capital requirements.
The Basel committee’s regulatory standards get transposed into domestic regulation, and the committee monitors its implementation on a semiannual basis based on information provided by each member jurisdiction. Entity managers must be ready to report on the bank’s adherence to the minimum standards and to provide entity data regarding liquidity and risk management to regulators.
Centralizing entity management and harnessing technology
When assessing the common entity challenges for the banking industry, each individual subsidiary group must decide the most efficient way to develop its own reporting, compliance and governance processes. The answer to this question can help to ease the entity challenges for the banking industry, or it can make those challenges harder to overcome.
Those that centralize entity management keep control with the parent company, which has a central view of all entity management practices regardless of where an entity is domiciled. Governance and compliance policies are set at the top and cascaded down for local implementation.
Conversely, some groups will devolve entity management to the local level, perhaps setting rough guidelines for what’s expected by the parent, but ultimately leaving its implementation to those in the jurisdiction who understand local requirements best.
Whichever model is chosen, entity challenges for the banking industry can be best overcome by having robust data management and by leveraging the best in modern governance technology to create a central repository and single source of truth for entity data.
Entity management software, such as Diligent Entities, helps banks to centralize, manage and effectively structure their corporate record to improve entity governance. This helps to better ensure compliance, mitigate risk and improve decision making through an integrated governance solution. It can help to surface the right information to the right people at the right time, while also providing the means to run reports, including organizational charts, for both regulators and boards that need to make strategic decisions.